Test Bank for Economics of Money, Banking and Financial Markets, 12th Edition by Frederic Mishkin by verifiedtutors

Test Bank for Economics of Money Banking and Financial Markets 12th Edition Frederic Mishkin

Economics of Money, Banking, and Financial Markets, 12e (Mishkin) Chapter 1 Why Study Money, Banking, and Financial Markets? 1.1 Why Study Financial Markets? 1) Financial markets promote economic efficiency by A) channeling funds from investors to savers. B) creating inflation. C) channeling funds from savers to investors. D) reducing investment. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 2) Financial markets promote greater economic efficiency by channeling funds from ________ to ________. A) investors; savers B) borrowers; savers C) savers; borrowers D) savers; lenders Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 3) Well-functioning financial markets promote A) inflation. B) deflation. C) unemployment. D) growth. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 4) A key factor in producing high economic growth is A) eliminating foreign trade. B) well-functioning financial markets. C) high interest rates. D) stock market volatility. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking

5) Markets in which funds are transferred from those who have excess funds available to those who have a shortage of available funds are called A) commodity markets. B) fund-available markets. C) derivative exchange markets. D) financial markets. Answer: D Ques Status: Previous Edition AACSB: Application of Knowledge 6) ________ markets transfer funds from people who have an excess of available funds to people who have a shortage. A) Commodity B) Fund-available C) Financial D) Derivative exchange Answer: C Ques Status: Previous Edition AACSB: Application of Knowledge 7) Poorly performing financial markets can be the cause of A) wealth. B) poverty. C) financial stability. D) financial expansion. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 8) The bond markets are important because they are A) easily the most widely followed financial markets in the United States. B) the markets where foreign exchange rates are determined. C) the markets where interest rates are determined. D) the markets where all borrowers get their funds. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 9) The price paid for the rental of borrowed funds (usually expressed as a percentage of the rental of $100 per year) is commonly referred to as the A) inflation rate. B) exchange rate. C) interest rate. D) aggregate price level. Answer: C Ques Status: Previous Edition AACSB: Application of Knowledge 3

10) Compared to interest rates on long-term U.S. government bonds, interest rates on threemonth Treasury bills fluctuate ________ and are ________ on average. A) more; lower B) less; lower C) more; higher D) less; higher Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 11) The interest rate on Baa corporate bonds is ________, on average, than interest rates on Treasuries, and the spread between these rates became ________ in the 1970s. A) lower; smaller B) lower; larger C) higher; smaller D) higher; larger Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 12) Everything else held constant, a decline in interest rates will cause spending on housing to A) fall. B) remain unchanged. C) either rise, fall, or remain the same. D) rise. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 13) High interest rates might ________ purchasing a house or car but at the same time high interest rates might ________ saving. A) discourage; encourage B) discourage; discourage C) encourage; encourage D) encourage; discourage Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking

14) An increase in interest rates might ________ saving because more can be earned in interest income. A) encourage B) discourage C) disallow D) invalidate Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 15) Everything else held constant, an increase in interest rates on student loans A) increases the cost of a college education. B) reduces the cost of a college education. C) has no effect on educational costs. D) increases costs for students with no loans. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 16) High interest rates might cause a corporation to ________ building a new plant that would provide more jobs. A) complete B) consider C) postpone D) contemplate Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 17) The stock market is A) where interest rates are determined. B) the most widely followed financial market in the United States. C) where foreign exchange rates are determined. D) the market where most borrowers get their funds. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 18) Stock prices are A) relatively stable trending upward at a steady pace. B) relatively stable trending downward at a moderate rate. C) extremely volatile. D) unstable trending downward at a moderate rate. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 19) A rising stock market index due to higher share prices 5

A) increases people's wealth, but is unlikely to increase their willingness to spend. B) increases people's wealth and as a result may increase their willingness to spend. C) decreases the amount of funds that business firms can raise by selling newly-issued stock. D) decreases people's wealth, but is unlikely to increase their willingness to spend. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 20) When stock prices fall A) an individual's wealth is not affected nor is their willingness to spend. B) a business firm will be more likely to sell stock to finance investment spending. C) an individual's wealth may decrease but their willingness to spend is not affected. D) an individual's wealth may decrease and their willingness to spend may decrease. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 21) Changes in stock prices A) do not affect people's wealth and their willingness to spend. B) affect firms' decisions to sell stock to finance investment spending. C) occur in regular patterns. D) are unimportant to decision makers. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 22) An increase in stock prices ________ the size of people's wealth and may ________ their willingness to spend, everything else held constant. A) increases; increase B) increases; decrease C) decreases; increase D) decreases; decrease Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 23) Low stock market prices might ________ consumers willingness to spend and might ________ businesses willingness to undertake investment projects. A) increase; increase B) increase; decrease C) decrease; decrease D) decrease; increase Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 24) Fear of a major recession causes stock prices to fall, everything else held constant, which in turn causes consumer spending to 6

A) increase. B) remain unchanged. C) decrease. D) cannot be determined. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 25) A share of common stock is a claim on a corporation's A) debt. B) liabilities. C) expenses. D) earnings and assets. Answer: D Ques Status: Previous Edition AACSB: Application of Knowledge 26) On ________, October 19, 1987, the stock market experienced its worst one-day drop in its entire history with the DJIA falling by 22%. A) "Terrible Tuesday" B) "Woeful Wednesday" C) "Freaky Friday" D) "Black Monday" Answer: D Ques Status: Previous Edition AACSB: Application of Knowledge 27) The decline in stock prices from 2000 through 2002 A) increased individuals' willingness to spend. B) had no effect on individual spending. C) reduced individuals' willingness to spend. D) increased individual wealth. Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 28) The Dow reached a peak of over 11,000 before the collapse of the ________ bubble in 2000. A) housing B) manufacturing C) high-tech D) banking Answer: C Ques Status: Previous Edition AACSB: Application of Knowledge 29) When I purchase a corporate ________, I am lending the corporation funds for a specific time. When I purchase a corporation's ________, I become an owner in the corporation. A) bond; stock 7

B) stock; bond C) stock; debt security D) bond; debt security Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 30) What is a stock? How do stocks affect the economy? Answer: A stock represents a share of ownership of a corporation, or a claim on a firm's earnings/assets. Stocks are part of wealth, and changes in their value affect people's willingness to spend. Changes in stock prices affect a firm's ability to raise funds, and thus their investment. Ques Status: Previous Edition AACSB: Application of Knowledge 31) Why is it important to understand the bond market? Answer: The bond market supports economic activity by enabling the government and corporations to borrow to undertake their projects and it is the market where interest rates are determined. Ques Status: Previous Edition AACSB: Application of Knowledge 1.2 Why Study Financial Institutions and Banking? 1) Channeling funds from individuals with surplus funds to those desiring funds when the saver does not purchase the borrower's security is known as A) barter. B) redistribution. C) financial intermediation. D) taxation. Answer: C Ques Status: Previous Edition AACSB: Application of Knowledge 2) A financial crisis is A) not possible in the modern financial environment. B) a major disruption in the financial markets. C) a feature of developing economies only. D) typically followed by an economic boom. Answer: B Ques Status: Previous Edition AACSB: Application of Knowledge

3) Banks are important to the study of money and the economy because they A) channel funds from investors to savers. B) have been a source of rapid financial innovation. C) are the only important financial institution in the U.S. economy. D) create inflation. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 4) Banks A) provide a channel for linking those who want to save with those who want to invest. B) produce nothing of value and are therefore a drain on society's resources. C) are the only financial institutions allowed to give loans. D) hold very little of the average American's wealth. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 5) Banks, savings and loan associations, mutual savings banks, and credit unions A) are no longer important players in financial intermediation. B) since deregulation now provide services only to small depositors. C) have been adept at innovating in response to changes in the regulatory environment. D) produce nothing of value and are therefore a drain on society's resources. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 6) Financial institutions search for ________ has resulted in many financial innovations. A) higher profits B) regulations C) respect D) higher risk Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 7) Banks and other financial institutions engage in financial intermediation, which A) can hurt the performance of the economy. B) can benefit economic performance. C) has no effect on economic performance. D) involves borrowing from investors and lending to savers. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking

8) Financial institutions that accept deposits and make loans are called A) exchanges. B) banks. C) over-the-counter markets. D) finance companies. Answer: B Ques Status: Previous Edition AACSB: Application of Knowledge 9) The financial intermediaries that the average person interacts with most frequently are A) exchanges. B) over-the-counter markets. C) finance companies. D) banks. Answer: D Ques Status: Previous Edition AACSB: Application of Knowledge 10) Which of the following is NOT a financial institution? A) a life insurance company B) a pension fund C) a credit union D) a business college Answer: D Ques Status: Previous Edition AACSB: Application of Knowledge 11) The delivery of financial services electronically is called A) e-business. B) e-commerce. C) e-finance. D) e-possible. Answer: C Ques Status: Previous Edition AACSB: Information Technology 12) What crucial role do financial intermediaries perform in an economy? Answer: Financial intermediaries borrow funds from people who have saved and make loans to other individuals and businesses and thus improve the efficiency of the economy. Ques Status: Previous Edition AACSB: Reflective Thinking

1.3 Why Study Money and Monetary Policy? 1) Money is defined as A) bills of exchange. B) anything that is generally accepted in payment for goods or services or in the repayment of debt. C) a risk-free repository of spending power. D) the unrecognized liability of governments. Answer: B Ques Status: Revised AACSB: Application of Knowledge 2) The upward and downward movement of aggregate output produced in the economy is referred to as the A) roller coaster. B) see saw. C) business cycle. D) shock wave. Answer: C Ques Status: Previous Edition AACSB: Application of Knowledge 3) Sustained downward movements in the business cycle are referred to as A) inflation. B) recessions. C) economic recoveries. D) expansions. Answer: B Ques Status: Previous Edition AACSB: Application of Knowledge 4) During a recession, output declines result in A) lower unemployment in the economy. B) higher unemployment in the economy. C) no impact on the unemployment in the economy. D) higher wages for the workers. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking

5) Prior to almost all recessions since 1950, there has been a drop in A) inflation. B) the money stock. C) the growth rate of the money stock. D) interest rates. Answer: C Ques Status: Previous Edition AACSB: Application of Knowledge 6) Evidence from business cycle fluctuations in the United States indicates that A) a negative relationship between money growth and general economic activity exists. B) recessions are usually preceded by declines in bond prices. C) recessions are usually preceded by dollar depreciation. D) recessions are usually preceded by a decline in the growth rate of money. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 7) ________ theory relates the quantity of money and monetary policy to changes in aggregate economic activity and inflation. A) Monetary B) Fiscal C) Financial D) Systemic Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 8) A continuing increase in the growth of the money supply is likely followed by A) a recession. B) a depression. C) an increase in the price level. D) no change in the economy. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 9) It is true that inflation is a A) continuous increase in the money supply. B) continuous fall in prices. C) decline in interest rates. D) continually rising price level. Answer: D Ques Status: Previous Edition AACSB: Application of Knowledge

10) Which of the following is a TRUE statement? A) Money or the money supply is defined as Federal Reserve notes. B) The average price of goods and services in an economy is called the aggregate price level. C) The inflation rate is measured as the rate of change in the federal government budget deficit. D) The aggregate price level is measured as the rate of change in the inflation rate. Answer: B Ques Status: Previous Edition AACSB: Application of Knowledge 11) If the prices would have been much higher ten years ago for the items the average consumer purchased last month, then one can likely conclude that A) the aggregate price level has declined during this ten-year period. B) the average inflation rate for this ten-year period has been positive. C) the average rate of money growth for this ten-year period has been positive. D) the aggregate price level has risen during this ten-year period. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 12) From 1950-2017 the price level in the United States increased more than A) twofold. B) threefold. C) sixfold. D) tenfold. Answer: C Ques Status: Revised AACSB: Reflective Thinking 13) Complete Milton Friedman's famous statement, "Inflation is always and everywhere a ________ phenomenon." A) recessionary B) discretionary C) repressionary D) monetary Answer: D Ques Status: Previous Edition AACSB: Application of Knowledge 14) There is a ________ association between inflation and the growth rate of money ________. A) positive; demand B) positive; supply C) negative; demand D) negative; supply Answer: B Ques Status: Previous Edition AACSB: Application of Knowledge 15) Evidence from the United States and other foreign countries indicates that 13

A) there is a strong positive association between inflation and growth rate of money over long periods of time. B) there is little support for the assertion that "inflation is always and everywhere a monetary phenomenon." C) countries with low monetary growth rates tend to experience higher rates of inflation, all else being constant. D) money growth is clearly unrelated to inflation. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 16) Countries that experience very high rates of inflation may also have A) balanced budgets. B) rapidly growing money supplies. C) falling money supplies. D) constant money supplies. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 17) Between 1950 and 1980 in the U.S., interest rates trended upward. During this same time period A) the rate of money growth declined. B) the rate of money growth increased. C) the government budget deficit (expressed as a percentage of GNP) trended downward. D) the aggregate price level declined quite dramatically. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 18) The management of money and interest rates is called ________ policy and is conducted by a nation's ________ bank. A) monetary; superior B) fiscal; superior C) fiscal; central D) monetary; central Answer: D Ques Status: Previous Edition AACSB: Application of Knowledge

19) The organization responsible for the conduct of monetary policy in the United States is the A) Comptroller of the Currency. B) U.S. Treasury. C) Federal Reserve System. D) Bureau of Monetary Affairs. Answer: C Ques Status: Previous Edition AACSB: Application of Knowledge 20) ________ policy involves decisions about government spending and taxation. A) Monetary B) Fiscal C) Financial D) Systemic Answer: B Ques Status: Previous Edition AACSB: Application of Knowledge 21) When tax revenues are greater than government expenditures, the government has a budget A) crisis. B) deficit. C) surplus. D) revision. Answer: C Ques Status: Previous Edition AACSB: Application of Knowledge 22) A budget ________ occurs when government expenditures exceed tax revenues for a particular time period. A) deficit B) surplus C) surge D) surfeit Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 23) Budgets deficits can be a concern because they might A) ultimately lead to higher inflation. B) lead to lower interest rates. C) lead to a slower rate of money growth. D) lead to higher bond prices. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking

24) Budget deficits are important because deficits A) cause bank failures. B) always cause interest rates to fall. C) can result in higher rates of monetary growth. D) always cause prices to fall. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 25) When a budget deficit occurs in the United States, the U.S. Treasury finances this deficit by A) borrowing. B) imposing a moratorium of new government spending. C) increasing the tax rate. D) printing more dollars. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 26) What happens to economic growth and unemployment during a business cycle recession? What is the relationship between the money growth rate and a business cycle recession? Answer: During a recession, output declines and unemployment increases. Prior to almost every recession in the U.S. the money growth rate has declined, however, not every decline is followed by a recession. Ques Status: Previous Edition AACSB: Reflective Thinking 1.4 Why Study International Finance? 1) American companies can borrow funds A) only in U.S. financial markets. B) only in foreign financial markets. C) in both U.S. and foreign financial markets. D) only from the U.S. government. Answer: C Ques Status: Previous Edition AACSB: Diverse and Multicultural Work Environments 2) The price of one country's currency in terms of another country's currency is called the A) exchange rate. B) interest rate. C) Dow Jones industrial average. D) prime rate. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge

3) The market where one currency is converted into another currency is called the ________ market. A) stock B) bond C) derivatives D) foreign exchange Answer: D Ques Status: Previous Edition AACSB: Application of Knowledge 4) Everything else constant, a stronger dollar will mean that A) vacationing in England becomes more expensive. B) vacationing in England becomes less expensive. C) French cheese becomes more expensive. D) Japanese cars become more expensive. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 5) Which of the following is most likely to result from a stronger dollar? A) U.S. goods exported aboard will cost less in foreign countries, and so foreigners will buy more of them. B) U.S. goods exported aboard will cost more in foreign countries and so foreigners will buy more of them. C) U.S. goods exported abroad will cost more in foreign countries, and so foreigners will buy fewer of them. D) Americans will purchase fewer foreign goods. Answer: C Ques Status: Previous Edition AACSB: Diverse and Multicultural Work Environments 6) Everything else held constant, a weaker dollar will likely hurt A) textile exporters in South Carolina. B) wheat farmers in Montana that sell domestically. C) automobile manufacturers in Michigan that use domestically produced inputs. D) furniture importers in California. Answer: D Ques Status: Previous Edition AACSB: Diverse and Multicultural Work Environments

7) Everything else held constant, a stronger dollar benefits ________ and hurts ________. A) American businesses; American consumers B) American businesses; foreign businesses C) American consumers; American businesses D) foreign businesses; American consumers Answer: C Ques Status: Previous Edition AACSB: Diverse and Multicultural Work Environments 8) From 1980 to early 1985 the dollar ________ in value, thereby benefiting American ________. A) appreciated; consumers B) appreciated; businesses C) depreciated; consumers D) depreciated; businesses Answer: A Ques Status: Previous Edition AACSB: Diverse and Multicultural Work Environments 9) From 1980 to 1985 the dollar appreciated relative to the British pound. Holding everything else constant, one would expect that, when compared to 1980 A) fewer Britons traveled to the United States in 1985. B) Britons imported more wine from California in 1985. C) Americans exported more wheat to England in 1985. D) more Britons traveled to the United States in 1985. Answer: A Ques Status: Previous Edition AACSB: Diverse and Multicultural Work Environments 10) When in 1985 a British pound cost approximately $1.30, a Shetland sweater that cost 100 British pounds would have cost $130. With a weaker dollar, the same Shetland sweater would have cost A) less than $130. B) more than $130. C) $130, since the exchange rate does not affect the prices that American consumers pay for foreign goods. D) $130, since the demand for Shetland sweaters will decrease to prevent an increase in price due to the stronger dollar. Answer: B Ques Status: Previous Edition AACSB: Diverse and Multicultural Work Environments

11) Everything else held constant, a decrease in the value of the dollar relative to all foreign currencies means that the price of foreign goods purchased by Americans A) increases B) decreases. C) remains unchanged. D) either increases, decreases, or remains unchanged. Answer: A Ques Status: Previous Edition AACSB: Diverse and Multicultural Work Environments 12) American farmers who sell beef to Europe benefit most from A) a decrease in the dollar price of euros. B) an increase in the dollar price of euros. C) a constant dollar price for euros. D) a European ban on imports of American beef. Answer: B Ques Status: Previous Edition AACSB: Diverse and Multicultural Work Environments 13) If the price of a euro (the European currency) increases from $1.00 to $1.10, then, everything else held constant A) a European vacation becomes less expensive. B) a European vacation becomes more expensive. C) the cost of a European vacation is not affected. D) foreign travel becomes impossible. Answer: B Ques Status: Previous Edition AACSB: Application of Knowledge 14) Everything else held constant, Americans who love French wine benefit most from A) a decrease in the dollar price of euros. B) an increase in the dollar price of euros. C) a constant dollar price for euros. D) a ban on imports from Europe. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 15) From 2002 to 2011, the dollar depreciated substantially against other currencies. This drop in value most likely benefitted A) European citizens traveling in the U.S. B) U.S. citizens traveling in Europe. C) U.S. manufacturers importing parts from abroad. D) U.S. citizens purchasing foreign-made automobiles. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 16) From 1980-1985, the dollar strengthened in value against other currencies. Who was helped 19

and who was hurt by this strong dollar? Answer: American consumers benefitted because imports were cheaper and consumers could purchase more. American businesses and workers in those businesses were hurt as domestic and foreign sales of American products fell. Ques Status: Previous Edition AACSB: Reflective Thinking 1.5 Money, Banking, and Financial Markets and Your Career 1) Students studying money, banking, and financial markets will learn A) critical thinking skills that will be useful in all careers. B) how to time the market. C) stock market tips. D) nothing of practical value. Answer: A Ques Status: New AACSB: Application of Knowledge 1.6 How We Will Study Money, Banking, and Financial Markets 1) The basic concepts used in the analytic framework of this text include all of the following EXCEPT A) the not-for-profit nature of most financial institutions. B) a basic supply and demand analysis to explain the behavior of financial markets. C) an approach to financial structure based on transaction costs and asymmetric information. D) the concept of equilibrium. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 2) Using a unified analytic framework to present the information in the text keeps the knowledge A) focused on theories that have little to do with actual behavior. B) theoretical and uninteresting. C) abstract and not applicable to real life. D) from becoming obsolete. Answer: D Ques Status: Previous Edition AACSB: Application of Knowledge

1.7 Appendix: Defining Aggregate Output, Income, the Price Level, and the Inflation Rate 1) The most comprehensive measure of aggregate output is A) gross domestic product. B) net national product. C) the stock value of the industrial 500. D) national income. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 2) The gross domestic product is the A) the value of all wealth in an economy. B) the value of all goods and services sold to other nations in a year. C) the market value of all final goods and services produced in an economy in a year. D) the market value of all intermediate goods and services produced in an economy in a year. Answer: C Ques Status: Previous Edition AACSB: Application of Knowledge 3) Which of the following items are NOT counted in U.S. GDP? A) your purchase of a new Ford Mustang B) your purchase of new tires for your old car C) GM's purchase of tires for new cars D) a foreign consumer's purchase of a new Ford Mustang Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 4) If an economy has aggregate output of $20 trillion, then aggregate income is A) $10 trillion. B) $20 trillion. C) $30 trillion. D) $40 trillion. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 5) When the total value of final goods and services is calculated using current prices, the resulting measure is referred to as A) real GDP. B) the GDP deflator. C) nominal GDP. D) the index of leading indicators. Answer: C Ques Status: Previous Edition AACSB: Application of Knowledge 6) Nominal GDP is output measured in ________ prices while real GDP is output measured in 21

________ prices. A) current; current B) current; fixed C) fixed; fixed D) fixed; current Answer: B Ques Status: Previous Edition AACSB: Application of Knowledge 7) GDP measured with constant prices is referred to as A) real GDP. B) nominal GDP. C) the GDP deflator. D) industrial production. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 8) If your nominal income in 2014 was $50,000, and prices doubled between 2014 and 2017, to have the same real income, your nominal income in 2017 must be A) $50,000. B) $75,000. C) $90,000. D) $100,000. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 9) If your nominal income in 2014 is $50,000, and prices increase by 50% between 2014 and 2017, then to have the same real income, your nominal income in 2017 must be A) $50,000. B) $75,000. C) $100,000. D) $150,000. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 10) To convert a nominal GDP to a real GDP, you would use A) the PCE deflator. B) the CPI measure. C) the GDP deflator. D) the PPI measure. Answer: C Ques Status: Previous Edition AACSB: Application of Knowledge 11) If nominal GDP in 2001 is $9 trillion, and 2001 real GDP in 1996 prices is $6 trillion, the GDP deflator price index is 22

A) 7. B) 100. C) 150. D) 200. Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 12) When prices are measured in terms of fixed (base-year) prices they are called ________ prices. A) nominal B) real C) inflated D) aggregate Answer: B Ques Status: Previous Edition AACSB: Application of Knowledge 13) The measure of the aggregate price level that is most frequently reported in the media is the A) GDP deflator. B) producer price index. C) consumer price index. D) household price index. Answer: C Ques Status: Previous Edition AACSB: Application of Knowledge 14) The measure of the aggregate price level that is frequently the focus of Federal Reserve officials is the A) consumer price index. B) producer price index. C) GDP deflator. D) PCE deflator. Answer: D Ques Status: Previous Edition AACSB: Application of Knowledge 15) To calculate the growth rate of a variable, you will A) calculate the percentage change from one time period to the next. B) calculate the difference between the two variables. C) add the ending value to the beginning value. D) divide the increase by the number of time periods. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 16) If real GDP grows from $10 trillion in 2002 to $10.5 trillion in 2003, the growth rate for real GDP is A) 5%. 23

B) 10%. C) 50%. D) 0.5%. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 17) If real GDP in 2002 is $10 trillion, and in 2003 real GDP is $9.5 trillion, then real GDP growth from 2002 to 2003 is A) 0.5%. B) 5%. C) 0%. D) -5%. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 18) If the aggregate price level at time t is denoted by Pt, the inflation rate from time t - 1 to t is defined as A) πt = (Pt - Pt - 1)/Pt - 1. B) πt = (Pt + 1 - Pt - 1)/Pt - 1. C) πt = (Pt + 1 - Pt )/Pt. D) πt = (Pt - Pt - 1)/Pt. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 19) If the price level increases from 200 in year 1 to 220 in year 2, the rate of inflation from year 1 to year 2 is A) 20%. B) 10%. C) 11%. D) 120%. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking

20) If the CPI is 120 in 1996 and 180 in 2002, then between 1996 and 2002, prices have increased by A) 180%. B) 80%. C) 60%. D) 50%. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 21) If the CPI in 2004 is 200, and in 2005 the CPI is 180, the rate of inflation from 2004 to 2005 is A) 20%. B) 10%. C) 0%. D) -10%. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking

Economics of Money, Banking, and Financial Markets, 12e (Mishkin) Chapter 2 An Overview of the Financial System 2.1 Function of Financial Markets 1) Every financial market has the following characteristic. A) It determines the level of interest rates. B) It allows common stock to be traded. C) It allows loans to be made. D) It channels funds from lenders-savers to borrowers-spenders. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 2) Financial markets have the basic function of A) getting people with funds to lend together with people who want to borrow funds. B) assuring that the swings in the business cycle are less pronounced. C) assuring that governments need never resort to printing money. D) providing a risk-free repository of spending power. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 3) Financial markets improve economic welfare because A) they channel funds from investors to savers. B) they allow consumers to time their purchase better. C) they weed out inefficient firms. D) they eliminate the need for indirect finance. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 4) Well-functioning financial markets A) cause inflation. B) eliminate the need for indirect finance. C) cause financial crises. D) allow the economy to operate more efficiently. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking

5) A breakdown of financial markets can result in A) financial stability. B) rapid economic growth. C) political instability. D) stable prices. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 6) The principal lender-savers are A) governments. B) businesses. C) households. D) foreigners. Answer: C Ques Status: Previous Edition AACSB: Application of Knowledge 7) Which of the following can be described as direct finance? A) You take out a mortgage from your local bank. B) You borrow $2,500 from a friend. C) You buy shares of common stock in the secondary market. D) You buy shares in a mutual fund. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 8) Assume that you borrow $2,000 at 10% annual interest to finance a new business project. For this loan to be profitable, the minimum amount this project must generate in annual earnings is A) $400. B) $201. C) $200. D) $199. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 9) You can borrow $5,000 to finance a new business venture. This new venture will generate annual earnings of $251. The maximum interest rate that you would pay on the borrowed funds and still increase your income is A) 25%. B) 12.5%. C) 10%. D) 5%. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 2 Copyright © 2019 Pearson Education, Inc.

10) Which of the following can be described as involving direct finance? A) A corporation issues new shares of stock. B) People buy shares in a mutual fund. C) A pension fund manager buys a short-term corporate security in the secondary market. D) An insurance company buys shares of common stock in the over-the-counter markets. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 11) Which of the following can be described as involving direct finance? A) A corporation takes out loans from a bank. B) People buy shares in a mutual fund. C) A corporation buys a short-term corporate security in a secondary market. D) People buy shares of common stock in the primary markets. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 12) Which of the following can be described as involving indirect finance? A) You make a loan to your neighbor. B) A corporation buys a share of common stock issued by another corporation in the primary market. C) You buy a U.S. Treasury bill from the U.S. Treasury at TreasuryDirect.gov. D) You make a deposit at a bank. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 13) Which of the following can be described as involving indirect finance? A) You make a loan to your neighbor. B) You buy shares in a mutual fund. C) You buy a U.S. Treasury bill from the U.S. Treasury at Treasury Direct.gov. D) You purchase shares in an initial public offering by a corporation in the primary market. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 14) Securities are ________ for the person who buys them, but are ________ for the individual or firm that issues them. A) assets; liabilities B) liabilities; assets C) negotiable; nonnegotiable D) nonnegotiable; negotiable Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 3 Copyright © 2019 Pearson Education, Inc.

15) With ________ finance, borrowers obtain funds from lenders by selling them securities in the financial markets. A) active B) determined C) indirect D) direct Answer: D Ques Status: Previous Edition AACSB: Application of Knowledge 16) With direct finance, funds are channeled through the financial market from the ________ directly to the ________. A) savers; spenders B) spenders; investors C) borrowers; savers D) investors; savers Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 17) Well functioning financial markets benefit ________ by allowing them to time their purchases more efficiently. A) consumers B) lenders C) creditors D) cashiers Answer: A Ques Status: New AACSB: Reflective Thinking 18) Distinguish between direct finance and indirect finance. Which of these is the most important source of funds for corporations in the United States? Answer: With direct finance, funds flow directly from the lender/saver to the borrower. With indirect finance, funds flow from the lender/saver to a financial intermediary who then channels the funds to the borrower/investor. Financial intermediaries (indirect finance) are the major source of funds for corporations in the U.S. Ques Status: Previous Edition AACSB: Reflective Thinking

2.2 Structure of Financial Markets 1) Which of the following statements about the characteristics of debt and equity is FALSE? A) They can both be long-term financial instruments. B) They can both be short-term financial instruments. C) They both involve a claim on the issuer's income. D) They both enable a corporation to raise funds. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 2) Which of the following statements about the characteristics of debt and equities is TRUE? A) They can both be long-term financial instruments. B) Bond holders are residual claimants. C) The income from bonds is typically more variable than that from equities. D) Bonds pay dividends. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 3) Which of the following statements about financial markets and securities is TRUE? A) A bond is a long-term security that promises to make periodic payments called dividends to the firm's residual claimants. B) A debt instrument is intermediate term if its maturity is less than one year. C) A debt instrument is intermediate term if its maturity is ten years or longer. D) The maturity of a debt instrument is the number of years (term) to that instrument's expiration date. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 4) Which of the following is an example of an intermediate-term debt? A) a fifteen-year mortgage B) a sixty-month car loan C) a six-month loan from a finance company D) a thirty-year U.S. Treasury bond Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking

5) If the maturity of a debt instrument is less than one year, the debt is called A) short-term. B) intermediate-term. C) long-term. D) prima-term. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 6) Long-term debt has a maturity that is A) between one and ten years. B) less than a year. C) between five and ten years. D) ten years or longer. Answer: D Ques Status: Previous Edition AACSB: Application of Knowledge 7) When I purchase ________, I own a portion of a firm and have the right to vote on issues important to the firm and to elect its directors. A) bonds B) bills C) notes D) stock Answer: D Ques Status: Previous Edition AACSB: Application of Knowledge 8) Equity holders are a corporation's ________. That means the corporation must pay all of its debt holders before it pays its equity holders. A) debtors B) brokers C) residual claimants D) underwriters Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 9) Which of the following benefits directly from any increase in the corporation's profitability? A) a bond holder B) a commercial paper holder C) a shareholder D) a T-bill holder Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 6 Copyright © 2019 Pearson Education, Inc.

10) A financial market in which previously issued securities can be resold is called a ________ market. A) primary B) secondary C) tertiary D) used securities Answer: B Ques Status: Previous Edition AACSB: Application of Knowledge 11) An important financial institution that assists in the initial sale of securities in the primary market is the A) investment bank. B) commercial bank. C) stock exchange. D) brokerage house. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 12) When an investment bank ________ securities, it guarantees a price for a corporation's securities and then sells them to the public. A) underwrites B) undertakes C) overwrites D) overtakes Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 13) Which of the following is NOT a secondary market? A) foreign exchange market B) futures market C) options market D) IPO market Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 14) ________ work in the secondary markets matching buyers with sellers of securities. A) Dealers B) Underwriters C) Brokers D) Claimants Answer: C Ques Status: Previous Edition AACSB: Application of Knowledge 7 Copyright © 2019 Pearson Education, Inc.

15) A corporation acquires new funds only when its securities are sold in the A) primary market by an investment bank. B) primary market by a stock exchange broker. C) secondary market by a securities dealer. D) secondary market by a commercial bank. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 16) A corporation acquires new funds only when its securities are sold in the A) secondary market by an investment bank. B) primary market by an investment bank. C) secondary market by a stock exchange broker. D) secondary market by a commercial bank. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 17) An important function of secondary markets is to A) make it easier to sell financial instruments to raise funds. B) raise funds for corporations through the sale of securities. C) make it easier for governments to raise taxes. D) create a market for newly constructed houses. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 18) Secondary markets make financial instruments more A) solid. B) vapid. C) liquid. D) risky. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 19) A liquid asset is A) an asset that can easily and quickly be sold to raise cash. B) a share of an ocean resort. C) difficult to resell. D) always sold in an over-the-counter market. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking

20) The higher a security's price in the secondary market the ________ funds a firm can raise by selling securities in the ________ market. A) more; primary B) more; secondary C) less; primary D) less; secondary Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 21) When secondary market buyers and sellers of securities meet in one central location to conduct trades the market is called a(n) A) exchange. B) over-the-counter market. C) common market. D) barter market. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 22) In a(n) ________ market, dealers in different locations buy and sell securities to anyone who comes to them and is willing to accept their prices. A) exchange B) over-the-counter C) common D) barter Answer: B Ques Status: Previous Edition AACSB: Application of Knowledge 23) Forty or so dealers establish a "market" in these securities by standing ready to buy and sell them. A) secondary stocks B) surplus stocks C) U.S. government bonds D) common stocks Answer: C Ques Status: Previous Edition AACSB: Application of Knowledge

24) Which of the following statements about financial markets and securities is TRUE? A) Many common stocks are traded over-the-counter, although the largest corporations usually have their shares traded at organized stock exchanges such as the New York Stock Exchange. B) As a corporation gets a share of the broker's commission, a corporation acquires new funds whenever its securities are sold. C) Capital market securities are usually more widely traded than shorter-term securities and so tend to be more liquid. D) Prices of capital market securities are usually more stable than prices of money market securities, and so are often used to hold temporary surplus funds of corporations. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 25) A financial market in which only short-term debt instruments are traded is called the ________ market. A) bond B) money C) capital D) stock Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 26) Equity instruments are traded in the ________ market. A) money B) bond C) capital D) commodities Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 27) Because these securities are more liquid and generally have smaller price fluctuations, corporations and banks use the ________ securities to earn interest on temporary surplus funds. A) money market B) capital market C) bond market D) stock market Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking

28) Corporations receive funds when their stock is sold in the primary market. Why do corporations pay attention to what is happening to their stock in the secondary market? Answer: The existence of the secondary market makes their stock more liquid and the price in the secondary market sets the price that the corporation would receive if they choose to sell more stock in the primary market. Ques Status: Previous Edition AACSB: Reflective Thinking 29) Describe the two methods of organizing a secondary market. Answer: A secondary market can be organized as an exchange where buyers and sellers meet in one central location to conduct trades. An example of an exchange is the New York Stock Exchange. A secondary market can also be organized as an over-the-counter market. In this type of market, dealers in different locations buy and sell securities to anyone who comes to them and is willing to accept their prices. An example of an over-the-counter market is the federal funds market. Ques Status: Previous Edition AACSB: Reflective Thinking 2.3 Financial Market Instruments 1) Prices of money market instruments undergo the least price fluctuations because of A) the short terms to maturity for the securities. B) the heavy regulations in the industry. C) the price ceiling imposed by government regulators. D) the lack of competition in the market. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 2) U.S. Treasury bills pay no interest but are sold at a ________. That is, you will pay a lower purchase price than the amount you receive at maturity. A) premium B) collateral C) default D) discount Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking

3) U.S. Treasury bills are considered the safest of all money market instruments because there is a low probability of A) defeat. B) default. C) desertion. D) demarcation. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 4) A debt instrument sold by a bank to its depositors that pays annual interest of a given amount and at maturity pays back the original purchase price is called A) commercial paper. B) a certificate of deposit. C) a municipal bond. D) federal funds. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 5) A short-term debt instrument issued by well-known corporations is called A) commercial paper. B) corporate bonds. C) municipal bonds. D) commercial mortgages. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 6) ________ are short-term loans in which Treasury bills serve as collateral. A) Repurchase agreements B) Negotiable certificates of deposit C) Federal funds D) U.S. government agency securities Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 7) Collateral is ________ the lender receives if the borrower does not pay back the loan. A) a liability B) an asset C) a present D) an offering Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 12 Copyright © 2019 Pearson Education, Inc.

8) Federal funds are A) funds raised by the federal government in the bond market. B) loans made by the Federal Reserve System to banks. C) loans made by banks to the Federal Reserve System. D) loans made by banks to each other. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 9) An important source of short-term funds for commercial banks are ________ which can be resold on the secondary market. A) negotiable CDs B) commercial paper C) mortgage-backed securities D) municipal bonds Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 10) Which of the following are short-term financial instruments? A) a repurchase agreement B) a share of Walt Disney Corporation stock C) a Treasury note with a maturity of four years D) a residential mortgage Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 11) Which of the following instruments are traded in a money market? A) state and local government bonds B) U.S. Treasury bills C) corporate bonds D) U.S. government agency securities Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 12) Which of the following instruments are traded in a money market? A) bank commercial loans B) commercial paper C) state and local government bonds D) residential mortgages Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking

13) Which of the following instruments is NOT traded in a money market? A) residential mortgages B) U.S. Treasury Bills C) negotiable bank certificates of deposit D) commercial paper Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 14) Bonds issued by state and local governments are called ________ bonds. A) corporate B) Treasury C) municipal D) commercial Answer: C Ques Status: Previous Edition AACSB: Application of Knowledge 15) Equity and debt instruments with maturities greater than one year are called ________ market instruments. A) capital B) money C) federal D) benchmark Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 16) Which of the following is a long-term financial instrument? A) a negotiable certificate of deposit B) a repurchase agreement C) a U.S. Treasury bond D) a U.S. Treasury bill Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 17) Which of the following instruments are traded in a capital market? A) U.S. Government agency securities B) negotiable bank CDs C) repurchase agreements D) U.S. Treasury bills Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking

18) Which of the following instruments are traded in a capital market? A) corporate bonds B) U.S. Treasury bills C) negotiable bank CDs D) repurchase agreements Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 19) Which of the following are NOT traded in a capital market? A) U.S. government agency securities B) state and local government bonds C) repurchase agreements D) corporate bonds Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 20) The most liquid securities traded in the capital market are A) corporate bonds. B) municipal bonds. C) U.S. Treasury bonds. D) mortgage-backed securities. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 21) Mortgage-backed securities are similar to ________ but the interest and principal payments are backed by the individual mortgages within the security. A) bonds B) stock C) repurchase agreements D) negotiable CDs Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 22) ________ bonds allow the holder to change them into a specific number of shares of stock at any time up to the maturity date. A) Convertible B) Treasury C) Municipal D) Commercial Answer: A Ques Status: New AACSB: Application of Knowledge 15 Copyright © 2019 Pearson Education, Inc.

2.4 Internationalization of Financial Markets 1) Equity of U.S. companies can be purchased by A) U.S. citizens only. B) foreign citizens only. C) U.S. citizens and foreign citizens. D) U.S. mutual funds only. Answer: C Ques Status: Previous Edition AACSB: Diverse and Multicultural Work Environments 2) One reason for the extraordinary growth of foreign financial markets is A) decreased trade. B) increases in the pool of savings in foreign countries. C) the recent introduction of the foreign bond. D) slower technological innovation in foreign markets. Answer: B Ques Status: Previous Edition AACSB: Diverse and Multicultural Work Environments 3) Bonds that are sold in a foreign country and are denominated in the country's currency in which they are sold are known as A) foreign bonds. B) Eurobonds. C) equity bonds. D) country bonds. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 4) Bonds that are sold in a foreign country and are denominated in a currency other than that of the country in which it is sold are known as A) foreign bonds. B) Eurobonds. C) equity bonds. D) country bonds. Answer: B Ques Status: Previous Edition AACSB: Application of Knowledge

5) If Microsoft sells a bond in London and it is denominated in dollars, the bond is a A) Eurobond. B) foreign bond. C) British bond. D) currency bond. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 6) U.S. dollar deposits in foreign banks outside the U.S. or in foreign branches of U.S. banks are called A) Atlantic dollars. B) Eurodollars. C) foreign dollars. D) outside dollars. Answer: B Ques Status: Previous Edition AACSB: Application of Knowledge 7) If Toyota (headquarters in Japan) sells a $1,000 bond in the United States, the bond is a A) foreign bond. B) Eurobond. C) Tokyo bond. D) currency bond. Answer: A Ques Status: Revised AACSB: Application of Knowledge 8) If Volkswagen, a German company, sells a euro-denominated bond in London, the bond is a A) Eurobond. B) foreign bond. C) currency bond. D) Duetsche bond. Answer: A Ques Status: New AACSB: Reflective Thinking 9) Distinguish between a foreign bond and a Eurobond. Answer: A foreign bond is sold in a foreign country and priced in that country's currency. A Eurobond is sold in a foreign country and priced in a currency that is not that country's currency. Ques Status: Previous Edition AACSB: Reflective Thinking

2.5 Function of Financial Intermediaries: Indirect Finance 1) The process of indirect finance using financial intermediaries is called A) direct lending. B) financial intermediation. C) resource allocation. D) financial liquidation. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 2) In the United States, loans from ________ are far ________ important for corporate finance than are securities markets. A) government agencies; more B) government agencies; less C) financial intermediaries; more D) financial intermediaries; less Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 3) The time and money spent in carrying out financial transactions are called A) economies of scale. B) financial intermediation. C) liquidity services. D) transaction costs. Answer: D Ques Status: Previous Edition AACSB: Application of Knowledge 4) Economies of scale enable financial institutions to A) reduce transactions costs. B) avoid the asymmetric information problem. C) avoid adverse selection problems. D) reduce moral hazard. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 5) An example of economies of scale in the provision of financial services is A) investing in a diversified collection of assets. B) providing depositors with a variety of savings certificates. C) hiring more support staff so that customers don't have to wait so long for assistance. D) spreading the cost of writing a standardized contract over many borrowers. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 18 Copyright © 2019 Pearson Education, Inc.

6) Financial intermediaries provide customers with liquidity services. Liquidity services A) make it easier for customers to conduct transactions. B) allow customers to have a cup of coffee while waiting in the lobby. C) are a result of the asymmetric information problem. D) are another term for asset transformation. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 7) The process where financial intermediaries create and sell low-risk assets and use the proceeds to purchase riskier assets is known as A) risk sharing. B) risk aversion. C) risk neutrality. D) risk selling. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 8) The process of asset transformation refers to the conversion of A) safer assets into risky assets. B) safer assets into safer liabilities. C) risky assets into safer assets. D) risky assets into risky liabilities. Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 9) Reducing risk through the purchase of assets whose returns do not always move together is A) diversification. B) intermediation. C) intervention. D) discounting. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 10) The concept of diversification is captured by the statement A) don't look a gift horse in the mouth. B) don't put all your eggs in one basket. C) it never rains, but it pours. D) make hay while the sun shines. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking

11) Risk sharing is profitable for financial institutions due to A) low transactions costs. B) asymmetric information. C) adverse selection. D) moral hazard. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 12) Typically, borrowers have superior information relative to lenders about the potential returns and risks associated with an investment project. The difference in information is called A) moral selection. B) risk sharing. C) asymmetric information. D) adverse hazard. Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 13) If bad credit risks are the ones who most actively seek loans and, therefore, receive them from financial intermediaries, then financial intermediaries face the problem of A) moral hazard. B) adverse selection. C) free-riding. D) costly state verification. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 14) The problem created by asymmetric information before the transaction occurs is called ________, while the problem created after the transaction occurs is called ________. A) adverse selection; moral hazard B) moral hazard; adverse selection C) costly state verification; free-riding D) free-riding; costly state verification Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge

15) Adverse selection is a problem associated with equity and debt contracts arising from A) the lender's relative lack of information about the borrower's potential returns and risks of his investment activities. B) the lender's inability to legally require sufficient collateral to cover a 100% loss if the borrower defaults. C) the borrower's lack of incentive to seek a loan for highly risky investments. D) the borrower's lack of good options for obtaining funds. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 16) An example of the problem of ________ is when a corporation uses the funds raised from selling bonds to fund corporate expansion to pay for Caribbean cruises for all of its employees and their families. A) adverse selection B) moral hazard C) risk sharing D) credit risk Answer: B Ques Status: Previous Edition AACSB: Ethical Understanding and Reasoning Abilities 17) Banks can lower the cost of information production by applying one information resource to many different services. This process is called A) economies of scale. B) asset transformation. C) economies of scope. D) asymmetric information. Answer: C Ques Status: Previous Edition AACSB: Application of Knowledge 18) Conflicts of interest are a type of ________ problem that can happen when an institution provides multiple services. A) adverse selection B) free-riding C) discounting D) moral hazard Answer: D Ques Status: Previous Edition AACSB: Ethical Understanding and Reasoning Abilities

19) Studies of the major developed countries show that when businesses go looking for funds to finance their activities they usually obtain these funds from A) government agencies. B) equities markets. C) financial intermediaries. D) bond markets. Answer: C Ques Status: Previous Edition AACSB: Application of Knowledge 20) The countries that have made the least use of securities markets are ________ and ________; in these two countries finance from financial intermediaries has been almost ten times greater than that from securities markets. A) Germany; Japan B) Germany; Great Britain C) Great Britain; Canada D) Canada; Japan Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 21) Although the dominance of ________ over ________ is clear in all countries, the relative importance of bond versus stock markets differs widely. A) financial intermediaries; securities markets B) financial intermediaries; government agencies C) government agencies; financial intermediaries D) government agencies; securities markets Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 22) Financial intermediaries are better equipped than individuals to screen out bad credit risks from good ones, thus reducing losses due to A) adverse selection. B) moral hazard. C) free-riding. D) economies of scope. Answer: A Ques Status: New AACSB: Reflective Thinking

23) Financial intermediaries have developed expertise in monitoring the parties they lend to, thus reducing losses due to A) moral hazard. B) adverse selection. C) free-riding. D) economies of scope. Answer: A Ques Status: New AACSB: Reflective Thinking 24) Because there is an imbalance of information in a lending situation, we must deal with the problems of adverse selection and moral hazard. Define these terms and explain how financial intermediaries can reduce these problems. Answer: Adverse selection is the asymmetric information problem that exists before the transaction occurs. For lenders, it is the difficulty in judging a good credit risk from a bad credit risk. Moral hazard is the asymmetric information problem that exists after the transaction occurs. For lenders, it is the difficulty in making sure the borrower uses the funds appropriately. Financial intermediaries can reduce adverse selection through intensive screening and can reduce moral hazard by monitoring the borrower. Ques Status: Previous Edition AACSB: Reflective Thinking 2.6 Types of Financial Intermediaries 1) Financial institutions that accept deposits and make loans are called ________ institutions. A) investment B) contractual savings C) depository D) underwriting Answer: C Ques Status: Previous Edition AACSB: Application of Knowledge 2) Thrift institutions include A) banks, mutual funds, and insurance companies. B) savings and loan associations, mutual savings banks, and credit unions. C) finance companies, mutual funds, and money market funds. D) pension funds, mutual funds, and banks. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking

3) Which of the following is a depository institution? A) a life insurance company B) a credit union C) a pension fund D) a mutual fund Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 4) Which of the following is a depository institution? A) a life insurance company B) a mutual savings bank C) a pension fund D) a finance company Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 5) Which of the following financial intermediaries is NOT a depository institution? A) a savings and loan association B) a commercial bank C) a credit union D) a finance company Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 6) The primary assets of credit unions are A) municipal bonds. B) business loans. C) consumer loans. D) mortgages. Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 7) The primary liabilities of a commercial bank are A) bonds. B) mortgages. C) deposits. D) commercial paper. Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking

8) The primary liabilities of depository institutions are A) premiums from policies. B) shares. C) deposits. D) bonds. Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 9) ________ institutions are financial intermediaries that acquire funds at periodic intervals on a contractual basis. A) Investment B) Contractual savings C) Thrift D) Depository Answer: B Ques Status: Previous Edition AACSB: Application of Knowledge 10) Which of the following is a contractual savings institution? A) a life insurance company B) a credit union C) a savings and loan association D) a mutual fund Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 11) Contractual savings institutions include A) mutual savings banks. B) money market mutual funds. C) commercial banks. D) life insurance companies. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 12) Which of the following are NOT contractual savings institutions? A) life insurance companies B) credit unions C) pension funds D) state and local government retirement funds Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking

13) Which of the following is NOT a contractual savings institution? A) a life insurance company B) a pension fund C) a savings and loan association D) a fire and casualty insurance company Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 14) The primary assets of a pension fund are A) money market instruments. B) corporate bonds and stock. C) consumer and business loans. D) mortgages. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 15) Which of the following are investment intermediaries? A) life insurance companies B) mutual funds C) pension funds D) state and local government retirement funds Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 16) An investment intermediary that lends funds to consumers is A) a finance company. B) an investment bank. C) a finance fund. D) a consumer company. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 17) The primary assets of a finance company are A) municipal bonds. B) corporate stocks and bonds. C) consumer and business loans. D) mortgages. Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking

18) ________ are financial intermediaries that acquire funds by selling shares to many individuals and using the proceeds to purchase diversified portfolios of stocks and bonds. A) Mutual funds B) Investment banks C) Finance companies D) Credit unions Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 19) Money market mutual fund shares function like A) checking accounts that pay interest. B) bonds. C) stocks. D) currency. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 20) An important feature of money market mutual fund shares is A) deposit insurance. B) the ability to write checks against shareholdings. C) the ability to borrow against shareholdings. D) claims on shares of corporate stock. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 21) The primary assets of money market mutual funds are A) stocks. B) bonds. C) money market instruments. D) deposits. Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 22) An investment bank helps ________ issue securities. A) a corporation B) the United States government C) the SEC D) foreign governments Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking

23) An investment bank purchases securities from a corporation at a predetermined price and then resells them in the market. This process is called A) underwriting. B) underhanded. C) understanding. D) undertaking. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 24) A mutual fund that is organized as a limited partnership with high minimum investments is called a A) hedge fund. B) investment bank. C) mutual savings bank. D) money market mutual fund. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 25) Hedge funds require large minimum investments ranging from ________ to ________ or more. A) $100,000; $1 million B) $1,000; $10,000 C) $100; $1,000 D) $$10,000; $25,000 Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 26) The limited memberships and high dollar minimums for hedge funds means that these funds are A) subject to weaker regulation than other mutual funds. B) more stringently regulated for fear of collapse. C) limited in the types of assets they can purchase. D) under the control of the U.S. Treasury. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge

27) Life insurance companies and fire and casualty insurance companies are both examples of contractual savings institutions. Because fire and casualty insurance companies have a greater possibility of loss of funds if disasters occur, they tend to hold more ________ assets than life insurance companies. A) liquid B) real C) long-term D) consumer loans Answer: A Ques Status: New AACSB: Analytical Thinking 2.7 Regulation of the Financial System 1) Which of the following is NOT a goal of financial regulation? A) ensuring the soundness of the financial system B) reducing moral hazard C) reducing adverse selection D) ensuring that investors never suffer losses Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 2) Increasing the amount of information available to investors helps to reduce the problems of ________ and ________ in the financial markets. A) adverse selection; moral hazard B) adverse selection; risk sharing C) moral hazard; transactions costs D) adverse selection; economies of scale Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 3) A goal of the Securities and Exchange Commission is to reduce problems arising from A) competition. B) banking panics. C) risk. D) asymmetric information. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking

4) The purpose of the disclosure requirements of the Securities and Exchange Commission is to A) increase the information available to investors. B) prevent bank panics. C) improve monetary control. D) protect investors against financial losses. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 5) Government regulations to reduce the possibility of financial panic include all of the following EXCEPT A) transactions costs. B) restrictions on assets and activities. C) disclosure. D) deposit insurance. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 6) Which of the following do NOT provide charters? A) the Office of the Comptroller of the Currency B) the Federal Reserve System C) the National Credit Union Administration D) state banking and insurance commissions Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 7) A restriction on bank activities that was repealed in 1999 was A) the prohibition of the payment of interest on checking deposits. B) restrictions on credit terms. C) minimum down payments on loans to purchase securities. D) separation of commercial banking from the securities industries. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 8) In order to reduce risk and increase the safety of financial institutions, commercial banks and other depository institutions are prohibited from A) owning municipal bonds. B) making real estate loans. C) making personal loans. D) owning common stock. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 30 Copyright © 2019 Pearson Education, Inc.

9) The primary purpose of deposit insurance is to A) improve the flow of information to investors. B) prevent banking panics. C) protect bank shareholders against losses. D) protect bank employees from unemployment. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 10) The agency that was created to protect depositors after the banking failures of 1930-1933 is the A) Federal Reserve System. B) Federal Deposit Insurance Corporation. C) Treasury Department. D) Office of the Comptroller of the Currency. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 11) The agency that restricts insider trading is the A) Federal Reserve System. B) Securities and Exchange Commission. C) Office of the Comptroller of the Currency. D) Federal Deposit Insurance Corporation. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 12) The regulatory agency that sets reserve requirements for all banks is A) the Federal Reserve System. B) the Federal Deposit Insurance Corporation. C) the Office of Thrift Supervision. D) the Securities and Exchange Commission. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 13) Asymmetric information is a universal problem. This would suggest that financial regulations A) in industrial countries are an unqualified failure. B) differ significantly around the world. C) in industrialized nations are similar. D) are unnecessary. Answer: C Ques Status: Previous Edition AACSB: Application of Knowledge 31 Copyright © 2019 Pearson Education, Inc.

14) How do regulators help to ensure the soundness of financial intermediaries? Answer: Regulators restrict who can set up a financial intermediary, conduct regular examinations, restrict assets, and provide insurance to help ensure the soundness of financial intermediaries. Ques Status: Previous Edition AACSB: Reflective Thinking

Economics of Money, Banking, and Financial Markets, 12e (Mishkin) Chapter 3 What Is Money? 3.1 Meaning of Money 1) To an economist, ________ is anything that is generally accepted in payment for goods or services or in the repayment of debt. A) wealth B) income C) money D) credit Answer: C Ques Status: Revised AACSB: Application of Knowledge 2) Money is A) anything that is generally accepted in payment for goods or services or in the repayment of debt. B) a flow of earnings per unit of time. C) the total collection of pieces of property that are a store of value. D) always based on a precious metal like gold or silver. Answer: A Ques Status: Revised AACSB: Application of Knowledge 3) Currency includes A) paper money and coins. B) paper money, coins, and checks. C) paper money and checks. D) paper money, coins, checks, and savings deposits. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 4) Even economists have no single, precise definition of money because A) money supply statistics are a state secret. B) the Federal Reserve does not employ or report different measures of the money supply. C) the "moneyness" or liquidity of an asset is a matter of degree. D) economists find disagreement interesting and refuse to agree for ideological reasons. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking

5) The total collection of pieces of property that serve to store value is a person's A) wealth. B) income. C) money. D) credit. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 6) A person's house is part of her A) money. B) income. C) liabilities. D) wealth. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 7) ________ is used to make purchases while ________ is the total collection of pieces of property that serve to store value. A) Money; income B) Wealth; income C) Income; money D) Money; wealth Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 8) ________ is a flow of earnings per unit of time. A) Income B) Money C) Wealth D) Currency Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 9) An individual's annual salary is her A) money. B) income. C) wealth. D) liabilities. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking

10) When we say that money is a stock variable, we mean that A) the quantity of money is measured at a given point in time. B) we must attach a time period to the measure. C) it is sold in the equity market. D) money never loses purchasing power. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 11) The difference between money and income is that A) money is a flow and income is a stock. B) money is a stock and income is a flow. C) there is no difference—money and income are both stocks. D) there is no difference—money and income are both flows. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 12) Which of the following is a TRUE statement? A) Money and income are flow variables. B) Money is a flow variable. C) Income is a flow variable. D) Money and income are stock variables. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 13) Which of the following statements uses the economists' definition of money? A) I plan to earn a lot of money over the summer. B) Betsy is rich—she has a lot of money. C) I hope that I have enough money to buy my lunch today. D) The job with New Company gave me the opportunity to earn more money. Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 14) When we say that income is a flow variable, we mean that A) we must attach a time period to the measure for it to make sense. B) it is measured at a given point in time. C) it moves through our hands quickly. D) the value is constantly changing. Answer: A Ques Status: New AACSB: Reflective Thinking

3.2 Functions of Money 1) Of money's three functions, the one that distinguishes money from other assets is its function as a A) store of value. B) unit of account. C) standard of deferred payment. D) medium of exchange. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 2) If peanuts serve as a medium of exchange, a unit of account, and a store of value, then peanuts are A) bank deposits. B) reserves. C) money. D) loanable funds. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 3) ________ are the time and resources spent trying to exchange goods and services. A) Bargaining costs B) Transaction costs C) Contracting costs D) Barter costs Answer: B Ques Status: Previous Edition AACSB: Application of Knowledge 4) Compared to an economy that uses a medium of exchange, in a barter economy A) transaction costs are higher. B) transaction costs are lower. C) liquidity costs are higher. D) liquidity costs are lower. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking

5) When compared to exchange systems that rely on money, disadvantages of the barter system include A) the requirement of a double coincidence of wants. B) lowering the cost of exchanging goods over time. C) lowering the cost of exchange to those who would specialize. D) encouraging specialization and the division of labor. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 6) The conversion of a barter economy to one that uses money A) increases efficiency by reducing the need to exchange goods and services. B) increases efficiency by reducing the need to specialize. C) increases efficiency by reducing transactions costs. D) does not increase economic efficiency. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 7) Which of the following statements best explains how the use of money in an economy increases economic efficiency? A) Money increases economic efficiency because it is costless to produce. B) Money increases economic efficiency because it discourages specialization. C) Money increases economic efficiency because it decreases transactions costs. D) Money cannot have an effect on economic efficiency. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 8) When economists say that money promotes ________, they mean that money encourages specialization and the division of labor. A) bargaining B) contracting C) efficiency D) greed Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 9) Money ________ transaction costs, allowing people to specialize in what they do best. A) reduces B) increases C) enhances D) eliminates Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 5 Copyright © 2019 Pearson Education, Inc.

10) For a commodity to function effectively as money it must be A) easily standardized, making it easy to ascertain its value. B) difficult to make change. C) deteriorate quickly so that its supply does not become too large. D) hard to carry around. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 11) All of the following are necessary criteria for a commodity to function as money EXCEPT A) it must deteriorate quickly. B) it must be divisible. C) it must be easy to carry. D) it must be widely accepted. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 12) Whatever a society uses as money, the distinguishing characteristic is that it must A) be completely inflation proof. B) be generally acceptable as payment for goods and services or in the repayment of debt. C) contain gold. D) be produced by the government. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 13) All but the most primitive societies use money as a medium of exchange, implying that A) the use of money is economically efficient. B) barter exchange is economically efficient. C) barter exchange cannot work outside the family. D) inflation is not a concern. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 14) Kevin purchasing concert tickets with a $100 bill is an example of the ________ function of money. A) medium of exchange B) unit of account C) store of value D) specialization Answer: A Ques Status: Revised AACSB: Analytical Thinking

15) When money prices are used to facilitate comparisons of value, money is said to function as a A) unit of account. B) medium of exchange. C) store of value. D) payments-system ruler. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 16) When there are many goods in a barter system, A) transactions costs are minimized. B) there are multiple prices for each good. C) there is only one store of value. D) exchange of services is impossible. Answer: B Ques Status: Revised AACSB: Reflective Thinking 17) In a barter economy the number of prices in an economy with N goods is A) [N(N - 1)]/2. B) N(N/2). C) 2N. D) N(N/2) - 1. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 18) If there are five goods in a barter economy, one needs to know ten prices in order to exchange one good for another. If, however, there are ten goods in a barter economy, then one needs to know ________ prices in order to exchange one good for another. A) 20 B) 25 C) 30 D) 45 Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking

19) If there are four goods in a barter economy, then one needs to know ________ prices in order to exchange one good for another. A) 8 B) 6 C) 5 D) 4 Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 20) Because it is a unit of account, money A) increases transaction costs. B) reduces the number of prices that need to be calculated. C) does not earn interest. D) discourages specialization. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 21) Dennis notices that jackets are on sale for $99. In this case money is functioning as a A) medium of exchange. B) unit of account. C) store of value. D) payments-system ruler. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 22) As a store of value, money A) does not earn interest. B) cannot be a durable asset. C) must be currency. D) is a way of saving for future purchases. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 23) Patrick places his pocket change into his savings bank on his desk each evening. By his actions, Patrick indicates that he believes that money is a A) medium of exchange. B) unit of account. C) store of value. D) unit of specialization. Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 8 Copyright © 2019 Pearson Education, Inc.

24) ________ is the relative ease and speed with which an asset can be converted into a medium of exchange. A) Efficiency B) Liquidity C) Deflation D) Specialization Answer: B Ques Status: Previous Edition AACSB: Application of Knowledge 25) Increasing transactions costs of selling an asset make the asset A) more valuable. B) more liquid. C) less liquid. D) more moneylike. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 26) Since it does not have to be converted into anything else to make purchases, ________ is the most liquid asset. A) money B) stock C) artwork D) gold Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 27) Of the following assets, the least liquid is A) stocks. B) traveler's checks. C) checking deposits. D) a house. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 28) Ranking assets from most liquid to least liquid, the correct order is A) savings bonds; house; currency. B) currency; savings bonds; house. C) currency; house; savings bonds. D) house; savings bonds; currency. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 9 Copyright © 2019 Pearson Education, Inc.

29) People hold money even during inflationary episodes when other assets prove to be better stores of value. This can be explained by the fact that money is A) extremely liquid. B) a unique good for which there are no substitutes. C) the only thing accepted in economic exchange. D) backed by gold. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 30) If the price level doubles, the value of money A) doubles. B) more than doubles, due to scale economies. C) rises but does not double, due to diminishing returns. D) falls by 50 percent. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 31) A fall in the level of prices A) does not affect the value of money. B) has an uncertain effect on the value of money. C) increases the value of money. D) reduces the value of money. Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 32) A hyperinflation is A) a period of extreme inflation generally greater than 50% per month. B) a period of anxiety caused by rising prices. C) an increase in output caused by higher prices. D) impossible today because of tighter regulations. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 33) During hyperinflations A) the value of money rises rapidly. B) money no longer functions as a good store of value and people may resort to barter transactions on a much larger scale. C) middle-class savers benefit as prices rise. D) money's value remains fixed to the price level; that is, if prices double so does the value of money. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 10 Copyright © 2019 Pearson Education, Inc.

34) Because inflation in Germany after World War I sometimes exceeded 1,000% per month, one can conclude that the German economy suffered from A) deflation. B) disinflation. C) hyperinflation. D) superdeflation. Answer: C Ques Status: Previous Edition AACSB: Application of Knowledge 35) If merchants in the country Zed choose to close their doors, preferring to be stuck with rotting merchandise rather than worthless currency, then one can conclude that Zed is experiencing a A) superdeflation. B) hyperdeflation. C) disinflation. D) hyperinflation. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 36) During the German hyperinflation after World War I, transactions costs skyrocketed. As a result, not surprisingly, output A) declined sharply. B) increased dramatically. C) did not change. D) grew at a much smaller pace than prior to the war. Answer: A Ques Status: New AACSB: Application of Knowledge 37) Explain how cigarettes could be called "money" in prisoner-of-war camps of World War II. Answer: The cigarettes performed the three functions of money. They served as the medium of exchange because individuals did exchange items for cigarettes. They served as a unit of account because prices were quoted in terms of the number of cigarettes required for the exchange. They served as a store of value because an individual would be willing to save their cigarettes even if they did not smoke because they believed that they could exchange the cigarettes for something that they did want at some time in the future. Ques Status: Previous Edition AACSB: Reflective Thinking

3.3 Evolution of the Payments System 1) The payments system is A) the method of conducting transactions in the economy. B) used by union officials to set salary caps. C) an illegal method of rewarding contracts. D) used by your employer to determine salary increases. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 2) As the payments system evolves from barter to a monetary system, A) commodity money is likely to precede the use of paper currency. B) transaction costs increase. C) the number of prices that need to be calculated increase rather dramatically. D) specialization decreases. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 3) ________ money could be used for some other purpose other than as a medium of exchange, for example, gold coins could be melted down and turned into gold jewelry. A) Commodity B) Fiat C) Paper D) Electronic Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 4) A disadvantage of ________made from precious metals is that it is very heavy and hard to transport from one place to another. A) commodity money B) fiat money C) electronic money D) paper money Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking

5) Paper currency that has been declared legal tender but is not convertible into coins or precious metals is called ________ money. A) commodity B) fiat C) electronic D) funny Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 6) When paper currency is decreed by governments as legal tender, legally it must be A) paper currency backed by gold. B) a precious metal such as gold or silver. C) accepted as payment for debts. D) convertible into an electronic payment. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 7) The evolution of the payments system from barter to precious metals, then to fiat money, then to checks can best be understood as a consequence of the fact that A) paper is more costly to produce than precious metals. B) precious metals were not generally acceptable. C) precious metals were difficult to carry and transport. D) paper money is less accepted than checks. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 8) As a means of payment, coins have the major drawback that they A) are heavy and hard to transport. B) are hard to counterfeit. C) are not the most liquid assets. D) must be backed by gold. Answer: A Ques Status: Revised AACSB: Reflective Thinking 9) Although ________ currency is lighter than coins made of metals, a disadvantage arising from modern technology is the ease of ________. A) paper; transport B) commodity; counterfeiting C) fiat; transport D) paper; counterfeiting Answer: D Ques Status: Previous Edition AACSB: Information Technology 13 Copyright © 2019 Pearson Education, Inc.

10) An advantage of checks as a method of payment is that A) they provide convenient receipts for purchases. B) they can never be stolen. C) they are more widely accepted than currency. D) the funds from a deposited check are available for use immediately. Answer: A Ques Status: Revised AACSB: Reflective Thinking 11) The evolution of the payments system from barter to precious metals, then to fiat money, then to checks can best be understood as a consequence of A) government regulations designed to improve the efficiency of the payments system. B) government regulations designed to promote the safety of the payments system. C) innovations that reduced the costs of exchanging goods and services. D) competition among firms to make it easier for customers to purchase their products. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 12) Compared to an electronic payments system, a payments system based on checks has the major drawback that A) checks are less costly to process. B) checks take longer to process, meaning that it may take several days before the depositor can get her cash. C) fraud may be more difficult to commit when paper receipts are eliminated. D) legal liability is more clearly defined. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 13) Which of the following sequences accurately describes the evolution of the payments system? A) barter, coins made of precious metals, paper currency, checks, electronic funds transfers B) barter, coins made of precious metals, checks, paper currency, electronic funds transfers C) barter, checks, paper currency, coins made of precious metals, electronic funds transfers D) barter, checks, paper currency, electronic funds transfers Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking

14) An important characteristic of the modern payments system has been the rapidly increasing use of A) checks and decreasing use of currency. B) electronic fund transfers. C) commodity monies. D) fiat money. Answer: B Ques Status: Previous Edition AACSB: Information Technology 15) Which of the following is NOT a form of e-money? A) a debit card B) a credit card C) a stored-value card D) a smart card Answer: B Ques Status: Previous Edition AACSB: Information Technology 16) A smart card is the equivalent of A) cash. B) savings bonds. C) savings deposits. D) certificates of deposit. Answer: A Ques Status: Previous Edition AACSB: Information Technology 17) An electronic payments system has not completely replaced the paper payments system because of all of the following reasons EXCEPT A) expensive equipment is necessary to set up the system. B) security concerns. C) privacy concerns. D) transportation costs. Answer: D Ques Status: Previous Edition AACSB: Information Technology 18) In explaining the evolution of money A) government regulation is the most important factor. B) commodity money, because it is valued more highly, tends to drive out paper money. C) new forms of money evolve to lower transaction costs. D) paper money is always backed by gold and therefore more desirable than checks. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 15 Copyright © 2019 Pearson Education, Inc.

19) A feature of Bitcoin, a new type of electronic money, that make it attractive as a medium of exchange is A) anonymous transactions. B) volatility of value. C) heavy regulations by the central bank. D) wide acceptance by businesses. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 20) Bitcoin fails to satisfy which two of the three functions of money? A) unit of account and store of value B) medium of exchange and unit of account C) medium of exchange and store of value D) bitcoin satisfies all of the functions of money Answer: A Ques Status: New AACSB: Application of Knowledge 21) What factors have slowed down the movement to a system where all payments are made electronically? Answer: The equipment necessary to set up the system is expensive, security of the information, and privacy concerns are issues that need to be addressed before an electronic payments system will be widely accepted. Ques Status: Previous Edition AACSB: Reflective Thinking 3.4 Measuring Money 1) Recent financial innovation makes the Federal Reserve's job of conducting monetary policy A) easier, since the Fed now knows what to consider money. B) more difficult, since the Fed now knows what to consider money. C) easier, since the Fed no longer knows what to consider money. D) more difficult, since the Fed no longer knows what to consider money. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 2) Defining money becomes ________ difficult as the pace of financial innovation ________. A) less; quickens B) more; quickens C) more; slows D) more; stops Answer: B Ques Status: Previous Edition AACSB: Information Technology 16 Copyright © 2019 Pearson Education, Inc.

3) Monetary aggregates are A) measures of the money supply reported by the Federal Reserve. B) measures of the wealth of individuals. C) never redefined since "money" never changes. D) reported by the Treasury Department annually. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 4) ________ is the narrowest monetary aggregate that the Fed reports. A) M0 B) M1 C) M2 D) M3 Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 5) The currency component includes paper money and coins held in A) bank vaults. B) ATMs. C) the hands of the nonbank public. D) the central bank. Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 6) The other checkable deposits component of the M1 measure reported by the Federal Reserve includes A) negotiable time deposits. B) money market mutual fund shares. C) automatic transfer from savings accounts. D) money market deposit accounts. Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 7) The components of the U.S. M1 money supply are demand deposits and other checkable deposits plus A) currency. B) currency plus savings deposits. C) currency plus traveler's checks. D) currency plus traveler's checks plus money market deposits. Answer: C Ques Status: Revised AACSB: Analytical Thinking 17 Copyright © 2019 Pearson Education, Inc.

8) The M1 measure of money includes A) small denomination time deposits. B) traveler's checks. C) money market deposit accounts. D) money market mutual fund shares. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 9) Which of the following is NOT included in the measure of M1? A) NOW accounts B) demand deposits C) currency D) savings deposits Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 10) Which of the following is NOT included in the M1 measure of money but is included in the M2 measure of money? A) currency B) traveler's checks C) demand deposits D) small-denomination time deposits Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 11) Which of the following is included in both M1 and M2? A) currency B) savings deposits C) small-denomination time deposits D) money market deposit accounts Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 12) Which of the following is NOT included in the monetary aggregate M2? A) currency B) savings bonds C) traveler's checks D) checking deposits Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking

13) Which of the following is included in M2 but NOT in M1? A) NOW accounts B) demand deposits C) currency D) money market mutual fund shares (retail) Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 14) Of the following, the largest measure is A) money market deposit accounts. B) demand deposits. C) M1. D) M2. Answer: D Ques Status: Revised AACSB: Analytical Thinking 15) If an individual redeems a U.S. savings bond for currency A) M1 stays the same and M2 decreases. B) M1 increases and M2 increases. C) M1 increases and M2 stays the same. D) M1 stays the same and M2 stays the same. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 16) If an individual moves money from a small-denomination time deposit to a demand deposit account A) M1 increases and M2 stays the same. B) M1 stays the same and M2 increases. C) M1 stays the same and M2 stays the same. D) M1 increases and M2 decreases. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 17) If an individual moves money from a demand deposit account to a money market deposit account A) M1 decreases and M2 stays the same. B) M1 stays the same and M2 increases. C) M1 stays the same and M2 stays the same. D) M1 increases and M2 decreases. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 19 Copyright © 2019 Pearson Education, Inc.

18) If an individual moves money from a savings deposit account to a money market deposit account A) M1 decreases and M2 stays the same. B) M1 stays the same and M2 increases. C) M1 stays the same and M2 stays the same. D) M1 increases and M2 decreases. Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 19) If an individual moves money from currency to a demand deposit account A) M1 decreases and M2 stays the same. B) M1 stays the same and M2 increases. C) M1 stays the same and M2 stays the same. D) M1 increases and M2 stays the same. Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 20) If an individual moves money from a money market deposit account to currency A) M1 increases and M2 stays the same. B) M1 stays the same and M2 increases. C) M1 stays the same and M2 stays the same. D) M1 increases and M2 decreases. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 21) If an individual uses money from a demand deposit account to purchase a U.S. savings bond A) M1 decreases and M2 stays the same. B) M1 stays the same and M2 increases. C) M1 stays the same and M2 stays the same. D) M1 decreases and M2 decreases. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 22) Small-denomination time deposits refer to certificates of deposit with a denomination of less than A) $1,000. B) $10,000. C) $100,000. D) $1,000,000. Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 20 Copyright © 2019 Pearson Education, Inc.

23) The M2 monetary aggregate contains everything that is in M1 plus other assets that are highly ________ (can be turned into cash quickly at very little cost). A) liquid B) stable C) consistent D) efficient Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 24) Which of the following statements accurately describes the two measures of the money supply? A) The two measures do not move together, so they cannot be used interchangeably by policymakers. B) The two measures' movements closely parallel each other, even on a month-to-month basis. C) Short-run movements in the money supply are extremely reliable. D) M2 is the narrowest measure the Fed reports. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 25) From 2004 to 2007, the growth rates of M1 and M2 A) were identical. B) both increased but at different rates. C) both decreased but at different rates. D) moved in opposite directions. Answer: D Ques Status: Previous Edition AACSB: Application of Knowledge 26) The Federal Reserve publishes the data on the monetary aggregates each week on A) Thursday. B) Monday. C) Friday. D) Wednesday. Answer: A Ques Status: New AACSB: Information Technology 27) Why are most of the U.S. dollars held outside of the United States? Answer: Concern about high inflation eroding the value of their own currency causes many people in foreign countries to hold U.S. dollars as a hedge against inflation risk. Ques Status: Previous Edition AACSB: Reflective Thinking

Economics of Money, Banking, and Financial Markets, 12e (Mishkin) Chapter 4 The Meaning of Interest Rates 4.1 Measuring Interest Rates 1) The concept of ________ is based on the common-sense notion that a dollar paid to you in the future is less valuable to you than a dollar today. A) present value B) future value C) interest D) deflation Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 2) The present value of an expected future payment ________ as the interest rate increases. A) falls B) rises C) is constant D) is unaffected Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 3) An increase in the time to the promised future payment ________ the present value of the payment. A) decreases B) increases C) has no effect on D) is irrelevant to Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 4) With an interest rate of 6 percent, the present value of $100 to be received next year is approximately A) $106. B) $100. C) $94. D) $92. Answer: C Ques Status: Revised AACSB: Analytical Thinking

5) What is the present value of $500.00 to be paid in two years if the interest rate is 5 percent? A) $453.51 B) $500.00 C) $476.25 D) $550.00 Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 6) If a security pays $55 in one year and $133 in three years, its present value is $150 if the interest rate is A) 5 percent. B) 10 percent. C) 12.5 percent. D) 15 percent. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 7) To claim that a lottery winner who is to receive $1 million per year for twenty years has won $20 million ignores the process of A) face value. B) par value. C) deflation. D) discounting the future. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 8) A credit market instrument that provides the borrower with an amount of funds that must be repaid at the maturity date along with an interest payment is known as a A) simple loan. B) fixed-payment loan. C) coupon bond. D) discount bond. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge

9) A credit market instrument that requires the borrower to make the same payment every period until the maturity date is known as a A) simple loan. B) fixed-payment loan. C) coupon bond. D) discount bond. Answer: B Ques Status: Previous Edition AACSB: Application of Knowledge 10) Which of the following are TRUE of fixed payment loans? A) The borrower repays both the principal and interest at the maturity date. B) Installment loans and mortgages are frequently of the fixed payment type. C) The borrower pays interest periodically and the principal at the maturity date. D) Commercial loans to businesses are often of this type. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 11) A fully amortized loan is another name for A) a simple loan. B) a fixed-payment loan. C) a commercial loan. D) an unsecured loan. Answer: B Ques Status: Previous Edition AACSB: Application of Knowledge 12) A credit market instrument that pays the owner a fixed coupon payment every year until the maturity date and then repays the face value is called a A) simple loan. B) fixed-payment loan. C) coupon bond. D) discount bond. Answer: C Ques Status: Previous Edition AACSB: Application of Knowledge 13) A ________ pays the owner a fixed coupon payment every year until the maturity date, when the ________ value is repaid. A) coupon bond; discount B) discount bond; discount C) coupon bond; face D) discount bond; face Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 3 Copyright © 2019 Pearson Education, Inc.

14) The ________ is the final amount that will be paid to the holder of a coupon bond. A) discount value B) coupon value C) face value D) present value Answer: C Ques Status: Previous Edition AACSB: Application of Knowledge 15) When talking about a coupon bond, face value and ________ mean the same thing. A) par value B) coupon value C) amortized value D) discount value Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 16) The dollar amount of the yearly coupon payment expressed as a percentage of the face value of the bond is called the bond's A) coupon rate. B) maturity rate. C) face value rate. D) payment rate. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 17) The ________ is calculated by multiplying the coupon rate times the par value of the bond. A) present value B) face value C) coupon payment D) maturity payment Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 18) If a $1,000 face value coupon bond has a coupon rate of 3.75 percent, then the coupon payment every year is A) $37.50. B) $3.75. C) $375.00. D) $13.75 Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 4 Copyright © 2019 Pearson Education, Inc.

19) If a $5,000 coupon bond has a coupon rate of 13 percent, then the coupon payment every year is A) $650. B) $1,300. C) $130. D) $13. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 20) An $8,000 coupon bond with a $400 coupon payment every year has a coupon rate of A) 5 percent. B) 8 percent. C) 10 percent. D) 40 percent. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 21) A $1,000 face value coupon bond with a $60 coupon payment every year has a coupon rate of A) .6 percent. B) 5 percent. C) 6 percent. D) 10 percent. Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 22) All of the following are examples of coupon bonds EXCEPT A) corporate bonds. B) U.S. Treasury bills. C) U.S. Treasury notes. D) U.S. Treasury bonds. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 23) A bond that is bought at a price below its face value and the face value is repaid at a maturity date is called a A) simple loan. B) fixed-payment loan. C) coupon bond. D) discount bond. Answer: D Ques Status: Previous Edition AACSB: Application of Knowledge 5 Copyright © 2019 Pearson Education, Inc.

24) A ________ is bought at a price below its face value, and the ________ value is repaid at the maturity date. A) coupon bond; discount B) discount bond; discount C) coupon bond; face D) discount bond; face Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 25) A discount bond A) pays the bondholder a fixed amount every period and the face value at maturity. B) pays the bondholder the face value at maturity. C) pays all interest and the face value at maturity. D) pays the face value at maturity plus any capital gain. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 26) Examples of discount bonds include A) U.S. Treasury bills. B) corporate bonds. C) U.S. Treasury notes. D) municipal bonds. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 27) Which of the following are TRUE for discount bonds? A) A discount bond is bought at par. B) The purchaser receives the face value of the bond at the maturity date. C) U.S. Treasury bonds and notes are examples of discount bonds. D) The purchaser receives the par value at maturity plus any capital gains. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 28) The interest rate that equates the present value of payments received from a debt instrument with its value today is the A) simple interest rate. B) current yield. C) yield to maturity. D) real interest rate. Answer: C Ques Status: Previous Edition AACSB: Application of Knowledge 6 Copyright © 2019 Pearson Education, Inc.

29) Economists consider the ________ to be the most accurate measure of interest rates. A) simple interest rate. B) current yield. C) yield to maturity. D) nominal interest rate. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 30) For simple loans, the simple interest rate is ________ the yield to maturity. A) greater than B) less than C) equal to D) not comparable to Answer: C Ques Status: Previous Edition AACSB: Application of Knowledge 31) If the amount payable in two years is $2,420 for a simple loan at 10 percent interest, the loan amount is A) $1,000. B) $1,210. C) $2,000. D) $2,200. Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 32) For a 3-year simple loan of $10,000 at 10 percent, the amount to be repaid is A) $10,030. B) $10,300. C) $13,000. D) $13,310. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 33) If $22,050 is the amount payable in two years for a $20,000 simple loan made today, the interest rate is A) 5 percent. B) 10 percent. C) 22 percent. D) 25 percent. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 7 Copyright © 2019 Pearson Education, Inc.

34) If a security pays $110 next year and $121 the year after that, what is its yield to maturity if it sells for $200? A) 9 percent B) 10 percent C) 11 percent D) 12 percent Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 35) The present value of a fixed-payment loan is calculated as the ________ of the present value of all cash flow payments. A) sum B) difference C) multiple D) log Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 36) Which of the following are TRUE for a coupon bond? A) When the coupon bond is priced at its face value, the yield to maturity equals the coupon rate. B) The price of a coupon bond and the yield to maturity are positively related. C) The yield to maturity is greater than the coupon rate when the bond price is above the par value. D) The yield is less than the coupon rate when the bond price is below the par value. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 37) The ________ of a coupon bond and the yield to maturity are inversely related. A) price B) par value C) maturity date D) term Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking

38) The price of a coupon bond and the yield to maturity are ________ related; that is, as the yield to maturity ________, the price of the bond ________. A) positively; rises; rises B) negatively; falls; falls C) positively; rises; falls D) negatively; rises; falls Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 39) The yield to maturity is ________ than the ________ rate when the bond price is ________ its face value. A) greater; coupon; above B) greater; coupon; below C) greater; perpetuity; above D) less; perpetuity; below Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 40) The ________ is below the coupon rate when the bond price is ________ its par value. A) yield to maturity; above B) yield to maturity; below C) discount rate; above D) discount rate; below Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 41) A $10,000 8 percent coupon bond that sells for $10,000 has a yield to maturity of A) 8 percent. B) 10 percent. C) 12 percent. D) 14 percent. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 42) Which of the following $1,000 face-value securities has the highest yield to maturity? A) a 5 percent coupon bond selling for $1,000 B) a 10 percent coupon bond selling for $1,000 C) a 12 percent coupon bond selling for $1,000 D) a 12 percent coupon bond selling for $1,100 Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 9 Copyright © 2019 Pearson Education, Inc.

43) Which of the following $5,000 face-value securities has the highest yield to maturity? A) a 6 percent coupon bond selling for $5,000 B) a 6 percent coupon bond selling for $5,500 C) a 10 percent coupon bond selling for $5,000 D) a 12 percent coupon bond selling for $4,500 Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 44) Which of the following $1,000 face-value securities has the highest yield to maturity? A) a 5 percent coupon bond with a price of $600 B) a 5 percent coupon bond with a price of $800 C) a 5 percent coupon bond with a price of $1,000 D) a 5 percent coupon bond with a price of $1,200 Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 45) Which of the following $1,000 face-value securities has the lowest yield to maturity? A) a 5 percent coupon bond selling for $1,000 B) a 10 percent coupon bond selling for $1,000 C) a 15 percent coupon bond selling for $1,000 D) a 15 percent coupon bond selling for $900 Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 46) Which of the following bonds would you prefer to be buying? A) a $10,000 face-value security with a 10 percent coupon selling for $9,000 B) a $10,000 face-value security with a 7 percent coupon selling for $10,000 C) a $10,000 face-value security with a 9 percent coupon selling for $10,000 D) a $10,000 face-value security with a 10 percent coupon selling for $10,000 Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 47) A coupon bond that has no maturity date and no repayment of principal is called a A) consol. B) cabinet. C) Treasury bill. D) Treasury note. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge

48) The price of a consol equals the coupon payment A) times the interest rate. B) plus the interest rate. C) minus the interest rate. D) divided by the interest rate. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 49) The interest rate on a consol equals the A) price times the coupon payment. B) price divided by the coupon payment. C) coupon payment plus the price. D) coupon payment divided by the price. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 50) A consol paying $20 annually when the interest rate is 5 percent has a price of A) $100. B) $200. C) $400. D) $800. Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 51) If a perpetuity has a price of $500 and an annual interest payment of $25, the interest rate is A) 2.5 percent. B) 5 percent. C) 7.5 percent. D) 10 percent. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 52) The yield to maturity for a perpetuity is a useful approximation for the yield to maturity on long-term coupon bonds. It is called the ________ when approximating the yield for a coupon bond. A) current yield B) discount yield C) future yield D) star yield Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 11 Copyright © 2019 Pearson Education, Inc.

53) The yield to maturity for a one-year discount bond equals the increase in price over the year, divided by the A) initial price. B) face value. C) interest rate. D) coupon rate. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 54) If a $10,000 face-value discount bond maturing in one year is selling for $5,000, then its yield to maturity is A) 5 percent. B) 10 percent. C) 50 percent. D) 100 percent. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 55) If a $5,000 face-value discount bond maturing in one year is selling for $5,000, then its yield to maturity is A) 0 percent. B) 5 percent. C) 10 percent. D) 20 percent. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 56) A discount bond selling for $15,000 with a face value of $20,000 in one year has a yield to maturity of A) 3 percent. B) 20 percent. C) 25 percent. D) 33.3 percent. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking

57) The yield to maturity for a discount bond is ________ related to the current bond price. A) negatively B) positively C) not D) directly Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 58) A discount bond is also called a ________ because the owner does not receive periodic payments. A) zero-coupon bond B) municipal bond C) corporate bond D) consol Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 59) Another name for a consol is a ________ because it is a bond with no maturity date. The owner receives fixed coupon payments forever. A) perpetuity B) discount bond C) municipality D) high-yield bond Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 60) Negative yields to maturity imply that bond purchasers are better off to hold cash. Acceptance of slightly negative yields by purchasers in recent times suggest that the A) convenience of storing large sums is also important to decisions. B) inflation rate is positive. C) governments have issued too many bonds. D) decision makers are only concerned with yields. Answer: A Ques Status: New AACSB: Reflective Thinking

61) If the interest rate is 5%, what is the present value of a security that pays you $1, 050 next year and $1,102.50 two years from now? If this security sold for $2,200, is the yield to maturity greater or less than 5%? Why? Answer: PV = $1,050/(1. +.05) + $1,102.50/(1 + 0.5)2 PV = $2,000 If this security sold for $2,200, the yield to maturity is less than 5%. The lower the interest rate the higher the present value. Ques Status: Previous Edition AACSB: Analytical Thinking 4.2 The Distinction Between Interest Rates and Returns 1) The ________ is defined as the payments to the owner plus the change in a security's value expressed as a fraction of the security's purchase price. A) yield to maturity B) current yield C) rate of return D) yield rate Answer: C Ques Status: Previous Edition AACSB: Application of Knowledge 2) Which of the following are TRUE concerning the distinction between interest rates and returns? A) The rate of return on a bond will not necessarily equal the interest rate on that bond. B) The return can be expressed as the difference between the current yield and the rate of capital gains. C) The rate of return will be greater than the interest rate when the price of the bond falls during the holding period. D) The return can be expressed as the sum of the discount yield and the rate of capital gains. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 3) The sum of the current yield and the rate of capital gain is called the A) rate of return. B) discount yield. C) perpetuity yield. D) par value. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking

4) What is the return on a 5 percent coupon bond that initially sells for $1,000 and sells for $1,200 next year? A) 5 percent B) 10 percent C) -5 percent D) 25 percent Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 5) What is the return on a 5 percent coupon bond that initially sells for $1,000 and sells for $900 next year? A) 5 percent B) 10 percent C) -5 percent D) -10 percent Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 6) The return on a 5 percent coupon bond that initially sells for $1,000 and sells for $950 next year is A) -10 percent. B) -5 percent. C) 0 percent. D) 5 percent. Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 7) Suppose you are holding a 5 percent coupon bond maturing in one year with a yield to maturity of 15 percent. If the interest rate on one-year bonds rises from 15 percent to 20 percent over the course of the year, what is the yearly return on the bond you are holding? A) 5 percent B) 10 percent C) 15 percent D) 20 percent Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking

8) I purchase a 10 percent coupon bond. Based on my purchase price, I calculate a yield to maturity of 8 percent. If I hold this bond to maturity, then my return on this asset is A) 10 percent. B) 8 percent. C) 12 percent. D) there is not enough information to determine the return. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 9) If the interest rates on all bonds rise from 5 to 6 percent over the course of the year, which bond would you prefer to have been holding? A) a bond with one year to maturity B) a bond with five years to maturity C) a bond with ten years to maturity D) a bond with twenty years to maturity Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 10) An equal decrease in all bond interest rates A) increases the price of a five-year bond more than the price of a ten-year bond. B) increases the price of a ten-year bond more than the price of a five-year bond. C) decreases the price of a five-year bond more than the price of a ten-year bond. D) decreases the price of a ten-year bond more than the price of a five-year bond. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 11) An equal increase in all bond interest rates A) increases the return to all bond maturities by an equal amount. B) decreases the return to all bond maturities by an equal amount. C) has no effect on the returns to bonds. D) decreases long-term bond returns more than short-term bond returns. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking

12) Which of the following are generally TRUE of bonds? A) A bond's return equals the yield to maturity when the time to maturity is the same as the holding period. B) A rise in interest rates is associated with a fall in bond prices, resulting in capital gains on bonds whose terms to maturity are longer than the holding periods. C) The longer a bond's maturity, the smaller is the size of the price change associated with an interest rate change. D) Prices and returns for short-term bonds are more volatile than those for longer-term bonds. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 13) Which of the following are generally TRUE of all bonds? A) The longer a bond's maturity, the greater is the rate of return that occurs as a result of the increase in the interest rate. B) Even though a bond has a substantial initial interest rate, its return can turn out to be negative if interest rates rise. C) Prices and returns for short-term bonds are more volatile than those for longer term bonds. D) A fall in interest rates results in capital losses for bonds whose terms to maturity are longer than the holding period. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 14) The riskiness of an asset's returns due to changes in interest rates is A) exchange-rate risk. B) price risk. C) asset risk. D) interest-rate risk. Answer: D Ques Status: Previous Edition AACSB: Application of Knowledge 15) Interest-rate risk is the riskiness of an asset's returns due to A) interest-rate changes. B) changes in the coupon rate. C) default of the borrower. D) changes in the asset's maturity. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge

16) Prices and returns for ________ bonds are more volatile than those for ________ bonds, everything else held constant. A) long-term; long-term B) long-term; short-term C) short-term; long-term D) short-term; short-term Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 17) There is ________ for any bond whose time to maturity matches the holding period. A) no interest-rate risk B) a large interest-rate risk C) rate-of-return risk D) yield-to-maturity risk Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 18) All bonds that will not be held to maturity have interest rate risk which occurs because of the change in the price of the bond as a result of A) interest-rate changes. B) changes in the coupon rate. C) default of the borrower. D) changes in the asset's maturity date. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 19) Short-term bonds are subject to ________ risk because proceeds must be put into some future asset at an unknown interest rate. A) reinvestment B) term C) liquidity D) default Answer: A Ques Status: New AACSB: Reflective Thinking 20) Your favorite uncle advises you to purchase long-term bonds because their interest rate is 10%. Should you follow his advice? Answer: It depends on where you think interest rates are headed in the future. If you think interest rates will be going up, you should not follow your uncle's advice because you would then have to discount your bond if you needed to sell it before the maturity date. Long-term bonds have a greater interest-rate risk. Ques Status: Previous Edition AACSB: Reflective Thinking 18 Copyright © 2019 Pearson Education, Inc.

4.3 The Distinction Between Real and Nominal Interest Rates 1) The ________ interest rate is adjusted for expected changes in the price level. A) ex ante real B) ex post real C) ex post nominal D) ex ante nominal Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 2) The ________ interest rate more accurately reflects the true cost of borrowing. A) nominal B) real C) discount D) market Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 3) The nominal interest rate minus the expected rate of inflation A) defines the real interest rate. B) is a less accurate measure of the incentives to borrow and lend than is the nominal interest rate. C) is a less accurate indicator of the tightness of credit market conditions than is the nominal interest rate. D) defines the discount rate. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 4) When the ________ interest rate is low, there are greater incentives to ________ and fewer incentives to ________. A) nominal; lend; borrow B) real; lend; borrow C) real; borrow; lend D) market; lend; borrow Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking

5) The interest rate that describes how well a lender has done in real terms after the fact is called the A) ex post real interest rate. B) ex ante real interest rate. C) ex post nominal interest rate. D) ex ante nominal interest rate. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 6) The ________ states that the nominal interest rate equals the real interest rate plus the expected rate of inflation. A) Fisher equation B) Keynesian equation C) Monetarist equation D) Marshall equation Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 7) If the nominal rate of interest is 2 percent, and the expected inflation rate is -10 percent, the real rate of interest is A) 2 percent. B) 8 percent. C) 10 percent. D) 12 percent. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 8) In which of the following situations would you prefer to be the lender? A) The interest rate is 9 percent and the expected inflation rate is 7 percent. B) The interest rate is 4 percent and the expected inflation rate is 1 percent. C) The interest rate is 13 percent and the expected inflation rate is 15 percent. D) The interest rate is 25 percent and the expected inflation rate is 50 percent. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 9) In which of the following situations would you prefer to be the borrower? A) The interest rate is 9 percent and the expected inflation rate is 7 percent. B) The interest rate is 4 percent and the expected inflation rate is 1 percent. C) The interest rate is 13 percent and the expected inflation rate is 15 percent. D) The interest rate is 25 percent and the expected inflation rate is 50 percent. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 20 Copyright © 2019 Pearson Education, Inc.

10) If you expect the inflation rate to be 15 percent next year and a one-year bond has a yield to maturity of 7 percent, then the real interest rate on this bond is A) 7 percent. B) 22 percent. C) -15 percent. D) -8 percent. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 11) If you expect the inflation rate to be 12 percent next year and a one-year bond has a yield to maturity of 7 percent, then the real interest rate on this bond is A) -5 percent. B) -2 percent. C) 2 percent. D) 12 percent. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 12) If you expect the inflation rate to be 4 percent next year and a one year bond has a yield to maturity of 7 percent, then the real interest rate on this bond is A) -3 percent. B) -2 percent. C) 3 percent. D) 7 percent. Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 13) In the United States during the late 1970s, the nominal interest rates were quite high, but the real interest rates were negative. From the Fisher equation, we can conclude that expected inflation in the United States during this period was A) irrelevant. B) low. C) negative. D) high. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking

14) The interest rate on Treasury Inflation Indexed Securities can be roughly interpreted as A) the real interest rate. B) the nominal interest rate. C) the rate of inflation. D) the rate of deflation. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 15) Assuming the same coupon rate and maturity length, the difference between the yield on a Treasury Inflation Indexed Security and the yield on a nonindexed Treasury security provides insight into A) the nominal interest rate. B) the real interest rate. C) the nominal exchange rate. D) the expected inflation rate. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 16) Assuming the same coupon rate and maturity length, when the interest rate on a Treasury Inflation Indexed Security is 3 percent, and the yield on a nonindexed Treasury bond is 8 percent, the expected rate of inflation is A) 3 percent. B) 5 percent. C) 8 percent. D) 11 percent. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 17) Since the early 1950s, nominal interest rates and real interest rates in the United States A) do not always move in the same direction. B) always increase proportionally. C) are never moving in the same direction. D) are of no interest to decision makers. Answer: A Ques Status: New AACSB: Reflective Thinking 18) Would it make sense to buy a house when mortgage rates are 14% and expected inflation is 15%? Explain your answer. Answer: Even though the nominal rate for the mortgage appears high, the real cost of borrowing the funds is -1%. Yes, under this circumstance it would be reasonable to make this purchase. Ques Status: Previous Edition AACSB: Reflective Thinking 22 Copyright © 2019 Pearson Education, Inc.

4.4 Web Appendix: Measuring Interest-Rate Risk: Duration 1) Duration is A) an asset's term to maturity. B) the time until the next interest payment for a coupon bond. C) the average lifetime of a debt security's stream of payments. D) the time between interest payments for a coupon bond. Answer: C Ques Status: Previous Edition AACSB: Application of Knowledge 2) Comparing a discount bond and a coupon bond with the same maturity A) the coupon bond has the greater effective maturity. B) the discount bond has the greater effective maturity. C) the effective maturity cannot be calculated for a coupon bond. D) the effective maturity cannot be calculated for a discount bond. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 3) The duration of a coupon bond increases A) the longer is the bond's term to maturity. B) when interest rates increase. C) the higher the coupon rate on the bond. D) the higher the bond price. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 4) All else equal, when interest rates ________, the duration of a coupon bond ________. A) rise; falls B) rise; increases C) falls; falls D) falls; does not change Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 5) All else equal, the ________ the coupon rate on a bond, the ________ the bond's duration. A) higher; longer B) higher; shorter C) lower; shorter D) greater; longer Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 23 Copyright © 2019 Pearson Education, Inc.

6) If a financial institution has 50% of its portfolio in a bond with a five-year duration and 50% of its portfolio in a bond with a seven-year duration, what is the duration of the portfolio? A) 12 years B) 7 years C) 6 years D) 5 years Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 7) An asset's interest rate risk ________ as the duration of the asset ________. A) increases; decreases B) decreases; decreases C) decreases; increases D) remains constant; increases Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 8) The duration of a portfolio of securities is the weighted ________ of the durations of the individual securities, with the weights reflecting the proportion of the portfolio invested in each security. A) average B) maximum C) minimum D) median Answer: A Ques Status: New AACSB: Analytical Thinking

Economics of Money, Banking, and Financial Markets, 12e (Mishkin) Chapter 5 The Behavior of Interest Rates 5.1 Determinants of Asset Demand 1) Pieces of property that serve as a store of value are called A) assets. B) units of account. C) liabilities. D) borrowings. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 2) Of the four factors that influence asset demand, which factor will cause the demand for all assets to increase when it increases, everything else held constant? A) wealth B) expected returns C) risk D) liquidity Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 3) If wealth increases, the demand for stocks ________ and that of long-term bonds ________, everything else held constant. A) increases; increases B) increases; decreases C) decreases; decreases D) decreases; increases Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 4) Everything else held constant, a decrease in wealth A) increases the demand for stocks. B) increases the demand for bonds. C) reduces the demand for silver. D) increases the demand for gold. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking

5) An increase in an asset's expected return relative to that of an alternative asset, holding everything else constant, ________ the quantity demanded of the asset. A) increases B) decreases C) has no effect on D) erases Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 6) Everything else held constant, if the expected return on Disney stock rises from 5 to 10 percent and the expected return on CBS stock is unchanged, then the expected return of holding CBS stock ________ relative to Disney stock and the demand for CBS stock ________. A) rises; rises B) rises; falls C) falls; rises D) falls; falls Answer: D Ques Status: Revised AACSB: Reflective Thinking 7) Everything else held constant, if the expected return on U.S. Treasury bonds falls from 10 to 5 percent and the expected return on GE stock rises from 7 to 8 percent, then the expected return of holding GE stock ________ relative to U.S. Treasury bonds and the demand for GE stock ________. A) rises; rises B) rises; falls C) falls; rises D) falls; falls Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 8) If housing prices are expected to increase, then, other things equal, the demand for houses will ________ and that of Treasury bills will ________. A) increase; increase B) increase; decrease C) decrease; decrease D) decrease; increase Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking

9) If stock prices are expected to drop dramatically, then, other things equal, the demand for stocks will ________ and that of Treasury bills will ________. A) increase; increase B) increase; decrease C) decrease; decrease D) decrease; increase Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 10) Everything else held constant, if the expected return on RST stock declines from 12 to 9 percent and the expected return on XYZ stock declines from 8 to 7 percent, then the expected return of holding RST stock ________ relative to XYZ stock and demand for XYZ stock ________. A) rises; rises B) rises; falls C) falls; rises D) falls; falls Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 11) Everything else held constant, if the expected return on U.S. Treasury bonds falls from 8 to 7 percent and the expected return on corporate bonds falls from 10 to 8 percent, then the expected return of corporate bonds ________ relative to U.S. Treasury bonds and the demand for corporate bonds ________. A) rises; rises B) rises; falls C) falls; rises D) falls; falls Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 12) An increase in the expected rate of inflation will ________ the expected return on bonds relative to the that on ________ assets, everything else held constant. A) reduce; financial B) reduce; real C) raise; financial D) raise; real Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking

13) If fluctuations in interest rates become smaller, then, other things equal, the demand for stocks ________ and the demand for long-term bonds ________. A) increases; increases B) increases; decreases C) decreases; decreases D) decreases; increases Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 14) If the price of gold becomes less volatile, then, other things equal, the demand for stocks will ________ and the demand for antiques will ________. A) increase; increase B) increase; decrease C) decrease; decrease D) decrease; increase Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 15) If brokerage commissions on bond sales decrease, then, other things equal, the demand for bonds will ________ and the demand for real estate will ________. A) increase; increase B) increase; decrease C) decrease; decrease D) decrease; increase Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 16) If gold becomes acceptable as a medium of exchange, the demand for gold will ________ and the demand for bonds will ________, everything else held constant. A) decrease; decrease B) decrease; increase C) increase; increase D) increase; decrease Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking

17) The demand for Picasso paintings rises (holding everything else equal) when A) stocks become easier to sell. B) people expect a boom in real estate prices. C) Treasury securities become riskier. D) people expect gold prices to rise. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 18) The demand for silver decreases, other things equal, when A) the gold market is expected to boom. B) the market for silver becomes more liquid. C) wealth grows rapidly. D) interest rates are expected to rise. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 19) You would be less willing to purchase U.S. Treasury bonds, other things equal, if A) you inherit $1 million from your Uncle Harry. B) you expect interest rates to fall. C) gold becomes more liquid. D) stock prices are expected to fall. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 20) You would be more willing to buy AT&T bonds (holding everything else constant) if A) the brokerage commissions on bond sales become cheaper. B) interest rates are expected to rise. C) your wealth has decreased. D) you expect diamonds to appreciate in value. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 21) The demand for gold increases, other things equal, when A) the market for silver becomes more liquid. B) interest rates are expected to rise. C) interest rates are expected to fall. D) real estate prices are expected to increase. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking

22) The demand for houses decreases, all else equal, when A) wealth increases. B) real estate prices are expected to increase. C) stock prices become more volatile. D) gold prices are expected to increase. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 23) Holding everything else constant A) if asset A's risk rises relative to that of alternative assets, the demand will increase for asset A. B) the more liquid is asset A, relative to alternative assets, the greater will be the demand for asset A. C) the lower the expected return to asset A relative to alternative assets, the greater will be the demand for asset A. D) if wealth increases, demand for asset A increases and demand for alternative assets decreases. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 24) Holding all other factors constant, the quantity demanded of an asset is A) positively related to wealth. B) negatively related to its expected return relative to alternative assets. C) positively related to the risk of its returns relative to alternative assets. D) negatively related to its liquidity relative to alternative assets. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 25) If the price of diamonds is expected to decrease, all else equal, then the demand for diamonds ________ and the demand for platinum ________. A) decreases; increases B) decreases; decreases C) increases; increases D) increases; decreases Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge

26) If prices in the diamond market become less volatile, all else equal, then the demand for diamonds ________ and the demand for gold ________. A) increases; decreases B) increases; increases C) decreases; decreases D) decreases; increases Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 27) Holding everything else equal, if the expected return on My Company stock increases from 10% to 15% and the expected return on That Company stock increases from 10% to 12%, the demand for My Company stock A) increases because the expected return has increased relative to the alternative asset. B) decreases because it is riskier. C) decreases because owners are now wealthier. D) increases because the expected return of That Company stock increased. Answer: A Ques Status: New AACSB: Analytical Thinking 28) Everything else held constant, would an increase in volatility of stock prices have any impact on the demand for rare coins? Why or why not? Answer: Yes, it would cause the demand for rare coins to increase. The increased volatility of stock prices means that there is relatively more risk in owning stock than there was previously and so the demand for an alternative asset, rare coins, would increase. Ques Status: Previous Edition AACSB: Reflective Thinking

5.2 Supply and Demand in the Bond Market 1) In the bond market, the bond demanders are the ________ and the bond suppliers are the ________. A) lenders; borrowers B) lenders; advancers C) borrowers; lenders D) borrowers; advancers Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 2) The demand curve for bonds has the usual downward slope, indicating that at ________ prices of the bond, everything else equal, the ________ is higher. A) higher; demand B) higher; quantity demanded C) lower; demand D) lower; quantity demanded Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 3) The bond demand curve is ________ sloping, indicating a(n) ________ relationship between the price and quantity demanded of bonds, everything else equal. A) downward; inverse B) downward; direct C) upward; inverse D) upward; direct Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 4) The supply curve for bonds has the usual upward slope, indicating that as the price ________, ceteris paribus, the ________ increases. A) falls; supply B) falls; quantity supplied C) rises; supply D) rises; quantity supplied Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking

5) The bond supply curve is ________ sloping, indicating a(n) ________ relationship between the price and quantity supplied of bonds, everything else equal. A) downward; inverse B) downward; direct C) upward; inverse D) upward; direct Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 6) In the bond market, the market equilibrium shows the market-clearing ________ and marketclearing ________. A) price; deposit B) interest rate; deposit C) price; interest rate D) interest rate; premium Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 7) When the price of a bond is above the equilibrium price, there is an excess ________ bonds and price will ________. A) demand for; rise B) demand for; fall C) supply of; fall D) supply of; rise Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 8) When the price of a bond is ________ the equilibrium price, there is an excess demand for bonds and price will ________. A) above; rise B) above; fall C) below; fall D) below; rise Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking

9) When the interest rate on a bond is above the equilibrium interest rate, in the bond market there is excess ________ and the interest rate will ________. A) demand; rise B) demand; fall C) supply; fall D) supply; rise Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 10) When the interest rate on a bond is ________ the equilibrium interest rate, in the bond market there is excess ________ and the interest rate will ________. A) above; demand; rise B) above; demand; fall C) below; supply; fall D) above; supply; rise Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 11) A situation in which the quantity of bonds supplied exceeds the quantity of bonds demanded is called a condition of excess supply; because people want to sell ________ bonds than others want to buy, the price of bonds will ________. A) fewer; fall B) fewer; rise C) more; fall D) more; rise Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 12) If the price of bonds is set ________ the equilibrium price, the quantity of bonds demanded exceeds the quantity of bonds supplied, a condition called excess ________. A) above; demand B) above; supply C) below; demand D) below; supply Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking

13) If the interest rate on a bond is above the equilibrium interest rate, there is an excess ________ for bonds and the bond price will ________. A) demand; rise B) demand; fall C) supply; rise D) supply; fall Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 14) If the interest rate on a bond is below the equilibrium interest rate, there is an excess ________ of bonds and the bond price will ________. A) demand; rise B) demand; fall C) supply; rise D) supply; fall Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 15) The equilibrium price and corresponding equilibrium interest rate in the bond market are found where A) the bond demand curve and the bond supply curve intersect. B) the bond demand is at its peak. C) the bond supply is at its peak. D) cannot be determined looking at the bond demand and bond supply curves. Answer: A Ques Status: New AACSB: Application of Knowledge

5.3 Changes in Equilibrium Interest Rates 1) A movement along the bond demand or supply curve occurs when ________ changes. A) bond price B) income C) wealth D) expected return Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 2) When the price of a bond decreases, all else equal, the bond demand curve A) shifts right. B) shifts left. C) does not shift. D) inverts. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 3) During business cycle expansions when income and wealth are rising, the demand for bonds ________ and the demand curve shifts to the ________, everything else held constant. A) falls; right B) falls; left C) rises; right D) rises; left Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 4) Everything else held constant, when households save less, wealth and the demand for bonds ________ and the bond demand curve shifts ________. A) increase; right B) increase; left C) decrease; right D) decrease; left Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking

5) Everything else held constant, if interest rates are expected to fall in the future, the demand for long-term bonds today ________ and the demand curve shifts to the ________. A) rises; right B) rises; left C) falls; right D) falls; left Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 6) Holding everything else constant, if interest rates are expected to increase, the demand for bonds ________ and the demand curve shifts ________. A) increases; right B) decreases; right C) increases; left D) decreases; left Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 7) Holding the expected return on bonds constant, an increase in the expected return on common stocks would ________ the demand for bonds, shifting the demand curve to the ________. A) decrease; left B) decrease; right C) increase; left D) increase; right Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 8) Everything else held constant, an increase in expected inflation, lowers the expected return on ________ compared to ________ assets. A) bonds; financial B) bonds; real C) real estate; financial D) real estate; real Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking

9) Everything else held constant, an increase in the riskiness of bonds relative to alternative assets causes the demand for bonds to ________ and the demand curve to shift to the ________. A) rise; right B) rise; left C) fall; right D) fall; left Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 10) Everything else held constant, when stock prices become less volatile, the demand curve for bonds shifts to the ________ and the interest rate ________. A) right; rises B) right; falls C) left; falls D) left; rises Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 11) Everything else held constant, when stock prices become ________ volatile, the demand curve for bonds shifts to the ________ and the interest rate ________. A) more; right; rises B) more; right; falls C) less; left; falls D) less; left; does not change Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 12) Everything else held constant, an increase in the liquidity of bonds results in a ________ in demand for bonds and the demand curve shifts to the ________. A) rise; right B) rise; left C) fall; right D) fall; left Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking

13) Everything else held constant, when bonds become less widely traded, and as a consequence the market becomes less liquid, the demand curve for bonds shifts to the ________ and the interest rate ________. A) right; rises B) right; falls C) left; falls D) left; rises Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 14) The reduction of brokerage commissions for trading common stocks that occurred in 1975 caused the demand for bonds to ________ and the demand curve to shift to the ________. A) fall; right B) fall; left C) rise; right D) rise; left Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 15) Factors that decrease the demand for bonds include A) an increase in the volatility of stock prices. B) a decrease in the expected returns on stocks. C) a decrease in the inflation rate. D) a decrease in the riskiness of stocks. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 16) During a recession, the supply of bonds ________ and the supply curve shifts to the ________, everything else held constant. A) increases; left B) increases; right C) decreases; left D) decreases; right Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking

17) In a business cycle expansion, the ________ of bonds increases and the ________ curve shifts to the ________ as business investments are expected to be more profitable, everything else held constant. A) supply; supply; right B) supply; supply; left C) demand; demand; right D) demand; demand; left Answer: A Ques Status: Revised AACSB: Reflective Thinking 18) When the expected inflation rate increases, the real cost of borrowing ________ and bond supply ________, everything else held constant. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 19) An increase in the expected inflation rate causes the supply of bonds to ________ and the supply curve to shift to the ________, everything else held constant. A) increase; left B) increase; right C) decrease; left D) decrease; right Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 20) Higher government deficits ________ the supply of bonds and shift the supply curve to the ________, everything else held constant. A) increase; left B) increase; right C) decrease; left D) decrease; right Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking

21) Factors that can cause the supply curve for bonds to shift to the right, everything else held constant, include A) an expansion in overall economic activity. B) a decrease in expected inflation. C) a decrease in government deficits. D) a business cycle recession. Answer: A Ques Status: Revised AACSB: Reflective Thinking 22) When the inflation rate is expected to increase, the ________ for bonds falls, while the ________ curve shifts to the right, everything else held constant. A) demand; demand B) demand; supply C) supply; demand D) supply; supply Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 23) When the expected inflation rate increases, the demand for bonds ________, the supply of bonds ________, and the interest rate ________, everything else held constant. A) increases; increases; rises B) decreases; decreases; falls C) increases; decreases; falls D) decreases; increases; rises Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 24) Everything else held constant, when the inflation rate is expected to rise, interest rates will ________; this result has been termed the ________. A) fall; Keynes effect B) fall; Fisher effect C) rise; Keynes effect D) rise; Fisher effect Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking

25) The economist Irving Fisher, after whom the Fisher effect is named, explained why interest rates ________ as the expected rate of inflation ________, everything else held constant. A) rise; increases B) rise; stabilizes C) fall; stabilizes D) fall; increases Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 26) Everything else held constant, during a business cycle expansion, the supply of bonds shifts to the ________ as businesses perceive more profitable investment opportunities, while the demand for bonds shifts to the ________ as a result of the increase in wealth generated by the economic expansion. A) right; left B) right; right C) left; left D) left; right Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 27) When the economy slips into a recession, normally the demand for bonds ________, the supply of bonds ________, and the interest rate ________, everything else held constant. A) increases; increases; rises B) decreases; decreases; falls C) increases; decreases; falls D) decreases; increases; rises Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 28) When an economy grows out of a recession, normally the demand for bonds ________ and the supply of bonds ________, everything else held constant. A) increases; increases B) increases; decreases C) decreases; decreases D) decreases; increases Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking

29) Deflation causes the demand for bonds to ________, the supply of bonds to ________, and bond prices to ________, everything else held constant. A) increase; increase; increase B) increase; decrease; increase C) decrease; increase; increase D) decrease; decrease; increase Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 30) In recent years in Europe, Japan, and the United States, interest rates have remained low because of a combination of A) low inflation and high government deficits. B) high inflation and high government deficits. C) high inflation and a lack of profitable investment opportunities. D) low inflation and a lack of profitable investment opportunities. Answer: D Ques Status: New AACSB: Application of Knowledge 31) When the interest rate changes, A) the demand curve for bonds shifts to the right. B) the demand curve for bonds shifts to the left. C) the supply curve for bonds shifts to the right. D) it is because either the demand or the supply curve has shifted. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 32) The interest rate falls when either the demand for bonds ________ or the supply of bonds ________. A) increases; increases B) increases; decreases C) decreases; decreases D) decreases; increases Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking

33) When the government has a surplus, as occurred in the late 1990s, the ________ curve of bonds shifts to the ________, everything else held constant. A) supply; right B) supply; left C) demand; right D) demand; left Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 34) A decrease in the brokerage commissions in the housing market from 6% to 5% of the sales price will shift the ________ curve for bonds to the ________, everything else held constant. A) demand; right B) demand; left C) supply; right D) supply; left Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 35) When the prices of rare coins become volatile, the ________ curve for bonds shifts to the ________, everything else held constant. A) demand; right B) demand; left C) supply; right D) supply; left Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 36) If people expect real estate prices to increase significantly, the ________ curve for bonds will shift to the ________, everything else held constant. A) demand; right B) demand; left C) supply; left D) supply; right Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking

37) Everything else held constant, when prices in the art market become more uncertain A) the demand curve for bonds shifts to the left and the interest rate rises. B) the demand curve for bonds shifts to the left and the interest rate falls. C) the demand curve for bonds shifts to the right and the interest rate falls. D) the supply curve for bonds shifts to the right and the interest rate falls. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 38) Everything else held constant, when real estate prices are expected to decrease A) the demand curve for bonds shifts to the left and the interest rate rises. B) the demand curve for bonds shifts to the left and the interest rate falls. C) the demand curve for bonds shifts to the right and the interest rate falls. D) the supply curve for bonds shifts to the right and the interest rate falls. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 39) Everything else held constant, when the government has higher budget deficits A) the demand curve for bonds shifts to the left and the interest rate rises. B) the demand curve for bonds shifts to the left and the interest rate falls. C) the supply curve for bonds shifts to the right and the interest rate falls. D) the supply curve for bonds shifts to the right and the interest rate rises. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 40) If stock prices are expected to climb next year, everything else held constant, the ________ curve for bonds shifts ________ and the interest rate ________. A) demand; left; rises B) demand; right; rises C) demand; left; falls D) supply; left; rises Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 41) If prices in the bond market become more volatile, everything else held constant, the demand curve for bonds shifts ________ and interest rates ________. A) left; rise B) left; fall C) right; rise D) right; fall Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 21 Copyright © 2019 Pearson Education, Inc.

42) If brokerage commissions on stocks fall, everything else held constant, the demand for bonds ________, the price of bonds ________, and the interest rate ________. A) decreases; decreases; increases B) decreases; decreases; decreases C) increases; decreases; increases D) increases; increases; increases Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 43) If the expected return on bonds increases, all else equal, the demand for bonds increases, the price of bonds ________, and the interest rate ________. A) increases; decreases B) increases; increases C) decreases; decreases D) decreases; increases Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 44) If real estate prices are expected to drop, all else equal, the demand for bonds ________ and the interest rate ________. A) increases; rises B) increases; falls C) decreases; rises D) decreases; falls Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking

45) In the figure above, a factor that could cause the supply of bonds to shift to the right is A) a decrease in government budget deficits. B) a decrease in expected inflation. C) a recession. D) a business cycle expansion. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 46) In the figure above, a factor that could cause the demand for bonds to decrease (shift to the left) is A) an increase in the expected return on bonds relative to other assets. B) a decrease in the expected return on bonds relative to other assets. C) an increase in wealth. D) a reduction in the riskiness of bonds relative to other assets. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 47) In the figure above, the price of bonds would fall from P1 to P2 when A) inflation is expected to increase in the future. B) interest rates are expected to fall in the future. C) the expected return on bonds relative to other assets is expected to increase in the future. D) the riskiness of bonds falls relative to other assets. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking

48) In the figure above, a factor that could cause the supply of bonds to increase (shift to the right) is A) a decrease in government budget deficits. B) a decrease in expected inflation. C) expectations of more profitable investment opportunities. D) a business cycle recession. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 49) In the figure above, a factor that could cause the demand for bonds to shift to the right is A) an increase in the riskiness of bonds relative to other assets. B) an increase in the expected rate of inflation. C) expectations of lower interest rates in the future. D) a decrease in wealth. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 50) In the figure above, the price of bonds would fall from P2 to P1 if A) there is a business cycle recession. B) there is a business cycle expansion. C) inflation is expected to increase in the future. D) inflation is expected to decrease in the future. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking

51) Holding everything else constant, if the price of a Bitcoin becomes less volatile, the demand for bonds ________, the price of bonds ________, and the interest rate ________. A) falls; falls; rises B) falls; falls; falls C) rises; rises; rises D) rises; falls; rises Answer: A Ques Status: New AACSB: Analytical Thinking 52) What is the impact on interest rates when the Federal Reserve decreases the money supply by selling bonds to the public? Answer: Bond supply increases and the bond supply curve shifts to the right. The new equilibrium bond price is lower and thus interest rates will increase. Ques Status: Previous Edition AACSB: Reflective Thinking 53) Use demand and supply analysis to explain why an expectation of Fed rate hikes would cause Treasury prices to fall. Answer: The expected return on bonds would decrease relative to other assets resulting in a decrease in the demand for bonds. The leftward shift of the bond demand curve results in a new lower equilibrium price for bonds. Ques Status: Previous Edition AACSB: Reflective Thinking 5.4 Supply and Demand in the Market for Money: The Liquidity Preference Framework 1) In Keynes's liquidity preference framework, individuals are assumed to hold their wealth in two forms A) real assets and financial assets. B) stocks and bonds. C) money and bonds. D) money and gold. Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 2) In Keynes's liquidity preference framework A) the demand for bonds must equal the supply of money. B) the demand for money must equal the supply of bonds. C) an excess demand of bonds implies an excess demand for money. D) an excess supply of bonds implies an excess demand for money. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking

3) In Keynes's liquidity preference framework, if there is excess demand for money, there is A) an excess demand for bonds. B) equilibrium in the bond market. C) an excess supply of bonds. D) too much money. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 4) The bond supply and demand framework is easier to use when analyzing the effects of changes in ________, while the liquidity preference framework provides a simpler analysis of the effects from changes in income, the price level, and the supply of ________. A) expected inflation; bonds B) expected inflation; money C) government budget deficits; bonds D) government budget deficits; money Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 5) Keynes assumed that money has ________ rate of return. A) a positive B) a negative C) a zero D) an increasing Answer: C Ques Status: Previous Edition AACSB: Application of Knowledge 6) In his Liquidity Preference Framework, Keynes assumed that money has a zero rate of return; thus A) when interest rates rise, the expected return on money falls relative to the expected return on bonds, causing the demand for money to fall. B) when interest rates rise, the expected return on money falls relative to the expected return on bonds, causing the demand for money to rise. C) when interest rates fall, the expected return on money falls relative to the expected return on bonds, causing the demand for money to fall. D) when interest rates fall, the expected return on money falls relative to the expected return on bonds, causing the demand for money to rise. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking

7) In Keynes's liquidity preference framework, as the expected return on bonds increases (holding everything else unchanged), the expected return on money ________, causing the demand for ________ to fall. A) falls; bonds B) falls; money C) rises; bonds D) rises; money Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 8) The opportunity cost of holding money is A) the level of income. B) the price level. C) the interest rate. D) the discount rate. Answer: C Ques Status: Previous Edition AACSB: Application of Knowledge 9) An increase in the interest rate A) increases the demand for money. B) increases the quantity of money demanded. C) decreases the demand for money. D) decreases the quantity of money demanded. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 10) If there is an excess supply of money A) individuals sell bonds, causing the interest rate to rise. B) individuals sell bonds, causing the interest rate to fall. C) individuals buy bonds, causing interest rates to fall. D) individuals buy bonds, causing interest rates to rise. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 11) If there is an excess demand for money, individuals ________ bonds, causing interest rates to ________. A) sell; rise B) sell; fall C) buy; rise D) buy; fall Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 27 Copyright © 2019 Pearson Education, Inc.

12) When the interest rate is above the equilibrium interest rate, there is an excess ________ money and the interest rate will ________. A) demand for; rise B) demand for; fall C) supply of; fall D) supply of; rise Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 13) In the market for money, an interest rate below equilibrium results in an excess ________ money and the interest rate will ________. A) demand for; rise B) demand for; fall C) supply of; fall D) supply of; rise Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 14) Holding everything else constant in the market for money, as the interest rate rises, the opportunity cost of holding money ________ thus making money less desirable. So the quantity of money demanded falls. A) increases B) decreases C) remains the same D) fluctuates Answer: A Ques Status: New AACSB: Application of Knowledge

5.5 Changes in Equilibrium Interest Rates in the Liquidity Preference Framework 1) In the Keynesian liquidity preference framework, an increase in the interest rate causes the demand curve for money to ________, everything else held constant. A) shift right B) shift left C) stay where it is D) invert Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 2) In the market for money, a lower level of income causes the demand for money to ________ and the interest rate to ________, everything else held constant. A) decrease; decrease B) decrease; increase C) increase; decrease D) increase; increase Answer: A Ques Status: Revised AACSB: Reflective Thinking 3) In the market for money, when real income ________, the demand curve for money shifts to the ________ and the interest rate ________, everything else held constant. A) falls; right; rises B) rises; right; rises C) falls; left; rises D) rises; left; rises Answer: B Ques Status: Revised AACSB: Reflective Thinking 4) In the market for money, business cycle expansions increase income, causing money demand to ________ and interest rates to ________, everything else held constant. A) increase; increase B) increase; decrease C) decrease; decrease D) decrease; increase Answer: A Ques Status: Revised AACSB: Reflective Thinking

5) In the Keynesian liquidity preference framework, a rise in the price level causes the demand for money to ________ and the demand curve to shift to the ________, everything else held constant. A) increase; left B) increase; right C) decrease; left D) decrease; right Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 6) In the market for money, when the price level ________, the demand curve for money shifts to the ________ and the interest rate ________, everything else held constant. A) falls; right; rises B) rises; right; falls C) falls; left; rises D) rises; right; rises Answer: D Ques Status: Revised AACSB: Reflective Thinking 7) In the market for money, a rise in the price level causes the demand for money to ________ and the interest rate to ________, everything else held constant. A) decrease; decrease B) decrease; increase C) increase; decrease D) increase; increase Answer: D Ques Status: Revised AACSB: Reflective Thinking 8) In the market for money, when the price level falls, the ________ curve for nominal money ________, and interest rates ________, everything else held constant. A) demand; decreases; fall B) demand; increases; rise C) supply; increases; rise D) supply; decreases; fall Answer: A Ques Status: Revised AACSB: Reflective Thinking

9) In the market for money, a decline in the expected inflation rate causes the demand for money to ________ and the demand curve to shift to the ________, everything else held constant. A) decrease; right B) decrease; left C) increase; right D) increase; left Answer: B Ques Status: Revised AACSB: Reflective Thinking 10) In the market for money, when the Fed decreases the money stock, the money supply curve shifts to the ________ and the interest rate ________, everything else held constant. A) right; rises B) right; falls C) left; falls D) left; rises Answer: D Ques Status: Revised AACSB: Reflective Thinking 11) In the market for money, when the Fed ________ the money stock, the money supply curve shifts to the ________ and the interest rate ________, everything else held constant. A) decreases; right; rises B) increases; right; falls C) decreases; left; falls D) increases; left; rises Answer: B Ques Status: Revised AACSB: Reflective Thinking 12) ________ in the money supply in the market for money creates excess ________ money, causing interest rates to ________, everything else held constant. A) A decrease; demand for; rise B) An increase; demand for; fall C) An increase; supply of; rise D) A decrease; supply of; fall Answer: A Ques Status: Revised AACSB: Reflective Thinking

13) ________ in the money supply in the market for money creates excess demand for ________, causing interest rates to ________, everything else held constant. A) An increase; money; rise B) An increase; bonds; fall C) A decrease; bonds; rise D) A decrease; money; fall Answer: B Ques Status: Revised AACSB: Reflective Thinking 14) In the market for money, when the price level falls, the ________ curve for nominal money ________, and interest rates ________, everything else held constant. A) demand; decreases; fall B) demand; increases; rise C) supply; increases; rise D) supply; decreases; fall Answer: A Ques Status: Revised AACSB: Reflective Thinking

15) In the figure above, one factor NOT responsible for the decline in the demand for money is A) a decline the price level. B) a decline in income. C) an increase in income. D) a decline in the expected inflation rate. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking

16) In the figure above, the decrease in the interest rate from i1 to i2 can be explained by A) a decrease in money growth. B) a decline in the expected price level. C) an increase in income. D) an increase in the expected price level. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking

17) In the figure above, the factor responsible for the decline in the interest rate is A) a decline the price level. B) a decline in income. C) an increase in the money supply. D) a decline in the expected inflation rate. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 18) In the figure above, the decrease in the interest rate from i1 to i2 can be explained by A) a decrease in money growth. B) an increase in money growth. C) a decline in the expected price level. D) an increase in income. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking

19) Using the liquidity preference framework, what will happen to interest rates if the Fed increases the money supply? Answer: The Fed's actions shift the money supply curve to the right. The new equilibrium interest rate will be lower than it was previously. Ques Status: Previous Edition AACSB: Reflective Thinking 20) Using the liquidity preference framework, show what happens to interest rates during a business cycle recession. Answer: During a business cycle recession, income will fall. This causes the money demand curve to shift to the left. The resulting equilibrium will be at a lower interest rate. Ques Status: Previous Edition AACSB: Reflective Thinking 5.6 Money and Interest Rates 1) Milton Friedman called the response of lower interest rates resulting from an increase in the money supply the ________ effect. A) liquidity B) price level C) expected-inflation D) income Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 2) Of the four effects on interest rates from an increase in the money supply, the initial effect is, generally, the A) income effect. B) liquidity effect. C) price level effect. D) expected inflation effect. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 3) In the liquidity preference framework, a one-time increase in the money supply results in a price level effect. The maximum impact of the price level effect on interest rates occurs A) at the moment the price level hits its peak (stops rising) because both the price level and expected inflation effects are at work. B) immediately after the price level begins to rise, because both the price level and expected inflation effects are at work. C) at the moment the expected inflation rate hits its peak. D) at the moment the inflation rate hits it peak. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 34 Copyright © 2019 Pearson Education, Inc.

4) Of the four effects on interest rates from an increase in the money supply, the one that works in the opposite direction of the other three is the A) liquidity effect. B) income effect. C) price level effect. D) expected inflation effect. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 5) It is possible that when the money supply rises, interest rates may ________ if the ________ effect is more than offset by changes in income, the price level, and expected inflation. A) fall; liquidity B) fall; risk C) rise; liquidity D) rise; risk Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 6) When the growth rate of the money supply increases, interest rates end up being permanently lower if A) the liquidity effect is larger than the other effects. B) there is fast adjustment of expected inflation. C) there is slow adjustment of expected inflation. D) the expected inflation effect is larger than the liquidity effect. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 7) When the growth rate of the money supply is increased, interest rates will fall immediately if the liquidity effect is ________ than the other money supply effects and there is ________ adjustment of expected inflation. A) larger; fast B) larger; slow C) smaller; slow D) smaller; fast Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking

8) If the Fed wants to permanently lower interest rates, then it should raise the rate of money growth if A) there is fast adjustment of expected inflation. B) there is slow adjustment of expected inflation. C) the liquidity effect is smaller than the expected inflation effect. D) the liquidity effect is larger than the other effects. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 9) If the liquidity effect is smaller than the other effects, and the adjustment to expected inflation is slow, then the A) interest rate will fall. B) interest rate will rise. C) interest rate will initially fall but eventually climb above the initial level in response to an increase in money growth. D) interest rate will initially rise but eventually fall below the initial level in response to an increase in money growth. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 10) If the liquidity effect is smaller than the other effects, and the adjustment to expected inflation is immediate, then the A) interest rate will fall. B) interest rate will rise. C) interest rate will fall immediately below the initial level when the money supply grows. D) interest rate will rise immediately above the initial level when the money supply grows. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking

11) In the figure above, illustrates the effect of an increased rate of money supply growth at time period 0. From the figure, one can conclude that the A) liquidity effect is smaller than the expected inflation effect and interest rates adjust quickly to changes in expected inflation. B) liquidity effect is larger than the expected inflation effect and interest rates adjust quickly to changes in expected inflation. C) liquidity effect is larger than the expected inflation effect and interest rates adjust slowly to changes in expected inflation. D) liquidity effect is smaller than the expected inflation effect and interest rates adjust slowly to changes in expected inflation. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 12) In the figure above, illustrates the effect of an increased rate of money supply growth at time period 0. From the figure, one can conclude that the A) Fisher effect is dominated by the liquidity effect and interest rates adjust slowly to changes in expected inflation. B) liquidity effect is dominated by the Fisher effect and interest rates adjust slowly to changes in expected inflation. C) liquidity effect is dominated by the Fisher effect and interest rates adjust quickly to changes in expected inflation. D) Fisher effect is smaller than the expected inflation effect and interest rates adjust quickly to changes in expected inflation. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking

13) The figure above illustrates the effect of an increased rate of money supply growth at time period T0. From the figure, one can conclude that the A) liquidity effect is smaller than the expected inflation effect and interest rates adjust quickly to changes in expected inflation. B) liquidity effect is larger than the expected inflation effect and interest rates adjust quickly to changes in expected inflation. C) liquidity effect is larger than the expected inflation effect and interest rates adjust slowly to changes in expected inflation. D) liquidity effect is smaller than the expected inflation effect and interest rates adjust slowly to changes in expected inflation. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 14) The figure above illustrates the effect of an increased rate of money supply growth at time period T0. From the figure, one can conclude that the A) Fisher effect is dominated by the liquidity effect and interest rates adjust slowly to changes in expected inflation. B) liquidity effect is dominated by the Fisher effect and interest rates adjust slowly to changes in expected inflation. C) liquidity effect is dominated by the Fisher effect and interest rates adjust quickly to changes in expected inflation. D) Fisher effect is smaller than the expected inflation effect and interest rates adjust quickly to changes in expected inflation. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking

15) The figure above illustrates the effect of an increased rate of money supply growth at time period T0. From the figure, one can conclude that the A) liquidity effect is smaller than the expected inflation effect and interest rates adjust quickly to changes in expected inflation. B) liquidity effect is larger than the expected inflation effect and interest rates adjust quickly to changes in expected inflation. C) liquidity effect is larger than the expected inflation effect and interest rates adjust slowly to changes in expected inflation. D) liquidity effect is smaller than the expected inflation effect and interest rates adjust slowly to changes in expected inflation. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 16) The figure above illustrates the effect of an increased rate of money supply growth at time period T0. From the figure, one can conclude that the A) Fisher effect is dominated by the liquidity effect and interest rates adjust slowly to changes in expected inflation. B) liquidity effect is dominated by the Fisher effect and interest rates adjust slowly to changes in expected inflation. C) liquidity effect is dominated by the Fisher effect and interest rates adjust quickly to changes in expected inflation. D) Fisher effect is smaller than the expected inflation effect and interest rates adjust quickly to changes in expected inflation. Answer: B Ques Status: Revised AACSB: Reflective Thinking

17) Interest rates increased continuously during the 1970s. The most likely explanation is A) banking failures that reduced the money supply. B) a rise in the level of income. C) the repeated bouts of recession and expansion. D) increasing expected rates of inflation. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 5.7 Web Appendix 1: Models of Asset Pricing 1) The riskiness of an asset is measured by A) the magnitude of its return. B) the absolute value of any change in the asset's price. C) the standard deviation of its return. D) risk is impossible to measure. Answer: C Ques Status: Previous Edition AACSB: Application of Knowledge 2) Holding many risky assets and thus reducing the overall risk an investor faces is called A) diversification. B) foolishness. C) risk acceptance. D) capitalization. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 3) The ________ the returns on two securities move together, the ________ benefit there is from diversification. A) less; more B) less; less C) more; more D) more; greater Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking

4) A higher ________ means that an asset's return is more sensitive to changes in the value of the market portfolio. A) alpha B) beta C) CAPM D) APT Answer: B Ques Status: Previous Edition AACSB: Application of Knowledge 5) The riskiness of an asset that is unique to the particular asset is A) systematic risk. B) portfolio risk. C) investment risk. D) nonsystematic risk. Answer: D Ques Status: Previous Edition AACSB: Application of Knowledge 6) The risk of a well-diversified portfolio depends only on the ________ risk of the assets in the portfolio. A) systematic B) nonsystematic C) portfolio D) investment Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 7) Both the CAPM and APT suggest that an asset should be priced so that it has a higher expected return A) when it has a greater systematic risk. B) when it has a greater risk in isolation. C) when it has a lower systematic risk. D) when it has a lower systematic risk and a lower risk in isolation. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking

8) In contrast to the CAPM, the APT assumes that there can be several sources of ________ that cannot be eliminated through diversification. A) nonsystematic risk B) systematic risk C) credit risk D) arbitrary risk Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 9) Risk averse investors always prefer to have higher ________ and lower ________ of the return. A) expected return; standard deviation B) standard deviation; expected return C) prices; standard deviation D) standard deviation; prices Answer: A Ques Status: New AACSB: Application of Knowledge 5.8 Web Appendix 2: Applying the Asset Market Approach to a Commodity Market: The Case of Gold 1) When stock prices become more volatile, the ________ curve for gold shifts right and gold prices ________, everything else held constant. A) demand; increase B) demand; decrease C) supply; increase D) supply; decrease Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 2) A return to the gold standard, that is, using gold for money will ________ the ________ for gold, ________ its price, everything else held constant. A) increase; demand; increasing B) decrease; demand; decreasing C) increase; supply; increasing D) decrease; supply; increasing Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking

3) When gold prices become more volatile, the ________ curve for gold shifts to the ________; ________ the price of gold. A) supply; right; increasing B) supply; left; increasing C) demand; right; decreasing D) demand; left; decreasing Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 4) Discovery of new gold in Alaska will ________ the ________ of gold, ________ its price, everything else held constant. A) increase; demand; increasing B) decrease; demand; decreasing C) decrease; supply; increasing D) increase; supply; decreasing Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 5) An increase in the expected inflation rate will ________ the ________ for gold, ________ its price, everything else held constant. A) increase; demand; increasing B) decrease; demand; decreasing C) increase; supply; increasing D) decrease; supply; increasing Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 6) The price of gold should be ________ to the expected inflation rate. A) positively related B) negatively related C) inversely related D) unrelated Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking

5.9 Web Appendix 3: Loanable Funds Framework 1) In the loanable funds framework, the ________ curve of bonds is equivalent to the ________ curve of loanable funds. A) demand; demand B) demand; supply C) supply; supply D) supply; equilibrium Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 2) In the loanable funds framework, the ________ is measured on the vertical axis. A) price of bonds B) interest rate C) quantity of bonds D) quantity of loanable funds Answer: B Ques Status: Previous Edition AACSB: Application of Knowledge 3) In the loanable funds framework, the demand curve of loanable funds is A) downward-sloping. B) upward-sloping. C) mound-shaped. D) u-shaped. Answer: A Ques Status: New AACSB: Application of Knowledge

Economics of Money, Banking, and Financial Markets, 12e (Mishkin) Chapter 6 The Risk and Term Structure of Interest Rates 6.1 Risk Structure of Interest Rates 1) The risk structure of interest rates is A) the structure of how interest rates move over time. B) the relationship among interest rates of different bonds with the same maturity. C) the relationship among the term to maturity of different bonds. D) the relationship among interest rates on bonds with different maturities. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 2) The risk that interest payments will not be made, or that the face value of a bond is not repaid when a bond matures is A) interest rate risk. B) inflation risk. C) liquidity risk. D) default risk. Answer: D Ques Status: Previous Edition AACSB: Application of Knowledge 3) Bonds with no default risk are called A) flower bonds. B) no-risk bonds. C) default-free bonds. D) zero-risk bonds. Answer: C Ques Status: Previous Edition AACSB: Application of Knowledge 4) Which of the following bonds are considered to be default-risk free? A) municipal bonds B) investment-grade bonds C) U.S. Treasury bonds D) junk bonds Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking

5) U.S. government bonds have no default risk because A) they are issued in strictly limited quantities. B) the federal government can increase taxes or print money to pay its obligations. C) they are backed with gold reserves. D) they can be exchanged for silver at any time. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 6) The spread between the interest rates on bonds with default risk and default-free bonds is called the A) risk premium. B) junk margin. C) bond margin. D) default premium. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 7) If the probability of a bond default increases because corporations begin to suffer large losses, then the default risk on corporate bonds will ________ and the expected return on these bonds will ________, everything else held constant. A) decrease; increase B) decrease; decrease C) increase; increase D) increase; decrease Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 8) A bond with default risk will always have a ________ risk premium and an increase in its default risk will ________ the risk premium. A) positive; raise B) positive; lower C) negative; raise D) negative; lower Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking

9) If a corporation begins to suffer large losses, then the default risk on the corporate bond will A) increase and the bond's return will become more uncertain, meaning the expected return on the corporate bond will fall. B) increase and the bond's return will become less uncertain, meaning the expected return on the corporate bond will fall. C) decrease and the bond's return will become less uncertain, meaning the expected return on the corporate bond will fall. D) decrease and the bond's return will become less uncertain, meaning the expected return on the corporate bond will rise. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 10) If the possibility of a default increases because corporations begin to suffer losses, then the default risk on corporate bonds will ________, and the bonds' returns will become ________ uncertain, meaning that the expected return on these bonds will decrease, everything else held constant. A) increase; less B) increase; more C) decrease; less D) decrease; more Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 11) Other things being equal, an increase in the default risk of corporate bonds shifts the demand curve for corporate bonds to the ________ and the demand curve for Treasury bonds to the ________. A) right; right B) right; left C) left; right D) left; left Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 12) Other things being equal, a decrease in the default risk of corporate bonds shifts the demand curve for corporate bonds to the ________ and the demand curve for Treasury bonds to the ________. A) right; right B) right; left C) left; right D) left; left Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 3 Copyright © 2019 Pearson Education, Inc.

13) A(n) ________ in the riskiness of corporate bonds will ________ the price of corporate bonds and ________ the yield on corporate bonds, all else equal. A) increase; increase; increase B) increase; decrease; increase C) decrease; increase; increase D) decrease; decrease; decrease Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 14) An increase in the riskiness of corporate bonds will ________ the price of corporate bonds and ________ the price of Treasury bonds, everything else held constant. A) increase; increase B) reduce; reduce C) reduce; increase D) increase; reduce Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 15) A decrease in the riskiness of corporate bonds will ________ the price of corporate bonds and ________ the price of Treasury bonds, everything else held constant. A) increase; increase B) reduce; reduce C) reduce; increase D) increase; reduce Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 16) An increase in the riskiness of corporate bonds will ________ the yield on corporate bonds and ________ the yield on Treasury securities, everything else held constant. A) increase; increase B) reduce; reduce C) increase; reduce D) reduce; increase Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking

17) A decrease in the riskiness of corporate bonds will ________ the yield on corporate bonds and ________ the yield on Treasury securities, everything else held constant. A) increase; increase B) decrease; decrease C) increase; decrease D) decrease; increase Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 18) An increase in default risk on corporate bonds ________ the demand for these bonds, but ________ the demand for default-free bonds, everything else held constant. A) increases; lowers B) lowers; increases C) does not change; greatly increases D) moderately lowers; does not change Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 19) A decrease in default risk on corporate bonds ________ the demand for these bonds, and ________ the demand for default-free bonds, everything else held constant. A) increases; lowers B) lowers; increases C) does not change; greatly increases D) moderately lowers; does not change Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 20) As default risk increases, the expected return on corporate bonds ________, and the return becomes ________ uncertain, everything else held constant. A) increases; less B) increases; more C) decreases; less D) decreases; more Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking

21) As default risk decreases, the expected return on corporate bonds ________, and the return becomes ________ uncertain, everything else held constant. A) increases; less B) increases; more C) decreases; less D) decreases; more Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 22) As their relative riskiness ________, the expected return on corporate bonds ________ relative to the expected return on default-free bonds, everything else held constant. A) increases; increases B) increases; decreases C) decreases; decreases D) decreases; does not change Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 23) Which of the following statements are TRUE? A) A decrease in default risk on corporate bonds lowers the demand for these bonds, but increases the demand for default-free bonds. B) The expected return on corporate bonds decreases as default risk increases. C) A corporate bond's return becomes less uncertain as default risk increases. D) As their relative riskiness increases, the expected return on corporate bonds increases relative to the expected return on default-free bonds. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 24) Everything else held constant, if the federal government were to guarantee today that it will pay creditors if a corporation goes bankrupt in the future, the interest rate on corporate bonds will ________ and the interest rate on Treasury securities will ________. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking

25) Bonds with relatively high risk of default are called A) Brady bonds. B) junk bonds. C) zero coupon bonds. D) investment grade bonds. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 26) Junk bonds, bonds with a low bond rating, are also known as A) high-yield bonds. B) investment grade bonds. C) high quality bonds. D) zero-coupon bonds. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 27) Bonds with relatively low risk of default are called ________ securities and have a rating of Baa (or BBB) and above; bonds with ratings below Baa (or BBB) have a higher default risk and are called ________. A) investment grade; lower grade B) investment grade; junk bonds C) high quality; lower grade D) high quality; junk bonds Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 28) Which of the following bonds would have the highest default risk? A) municipal bonds B) investment-grade bonds C) U.S. Treasury bonds D) junk bonds Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 29) Which of the following long-term bonds has the highest interest rate? A) corporate Baa bonds B) U.S. Treasury bonds C) corporate Aaa bonds D) municipal bonds Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 7 Copyright © 2019 Pearson Education, Inc.

30) Which of the following securities has the lowest interest rate? A) junk bonds B) U.S. Treasury bonds C) investment-grade bonds D) corporate Baa bonds Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 31) The spread between interest rates on low quality corporate bonds and U.S. government bonds A) widened significantly during the Great Depression. B) narrowed significantly during the Great Depression. C) narrowed moderately during the Great Depression. D) did not change during the Great Depression. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 32) During the Great Depression years 1930-1933 there was a very high rate of business failures and defaults, we would expect the risk premium for ________ bonds to be very high. A) U.S. Treasury B) corporate Aaa C) municipal D) corporate Baa Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 33) Risk premiums on corporate bonds tend to ________ during business cycle expansions and ________ during recessions, everything else held constant. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 34) The collapse of the subprime mortgage market A) did not affect the corporate bond market. B) increased the perceived riskiness of Treasury securities. C) reduced the Baa-Aaa spread. D) increased the Baa-Aaa spread. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 8 Copyright © 2019 Pearson Education, Inc.

35) The collapse of the subprime mortgage market increased the spread between Baa and default-free U.S. Treasury bonds. This is due to A) a reduction in risk. B) a reduction in maturity. C) a flight to quality. D) a flight to liquidity. Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 36) During a "flight to quality" A) the spread between Treasury bonds and Baa bonds increases. B) the spread between Treasury bonds and Baa bonds decreases. C) the spread between Treasury bonds and Baa bonds is not affected. D) the change in the spread between Treasury bonds and Baa bonds cannot be predicted. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 37) If you have a very low tolerance for risk, which of the following bonds would you be least likely to hold in your portfolio? A) a U.S. Treasury bond B) a municipal bond C) a corporate bond with a rating of Aaa D) a corporate bond with a rating of Baa Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 38) Which of the following statements is TRUE? A) A liquid asset is one that can be quickly and cheaply converted into cash. B) The demand for a bond declines when it becomes less liquid, decreasing the interest rate spread between it and relatively more liquid bonds. C) The differences in bond interest rates reflect differences in default risk only. D) The corporate bond market is the most liquid bond market. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 39) Corporate bonds are not as liquid as government bonds because A) fewer corporate bonds for any one corporation are traded, making them more costly to sell. B) the corporate bond rating must be calculated each time they are traded. C) corporate bonds are not callable. D) corporate bonds cannot be resold. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 9 Copyright © 2019 Pearson Education, Inc.

40) When the Treasury bond market becomes more liquid, other things equal, the demand curve for corporate bonds shifts to the ________ and the demand curve for Treasury bonds shifts to the ________. A) right; right B) right; left C) left; right D) left; left Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 41) When the Treasury bond market becomes less liquid, other things equal, the demand curve for corporate bonds shifts to the ________ and the demand curve for Treasury bonds shifts to the ________. A) right; right B) right; left C) left; right D) left; left Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 42) A decrease in the liquidity of corporate bonds, other things being equal, shifts the demand curve for corporate bonds to the ________ and the demand curve for Treasury bonds shifts to the ________. A) right; right B) right; left C) left; left D) left; right Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 43) An increase in the liquidity of corporate bonds, other things being equal, shifts the demand curve for corporate bonds to the ________ and the demand curve for Treasury bonds shifts to the ________. A) right; right B) right; left C) left; left D) left; right Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking

44) A(n) ________ in the liquidity of corporate bonds will ________ the price of corporate bonds and ________ the yield on corporate bonds, all else equal. A) increase; increase; decrease B) increase; decrease; decrease C) decrease; increase; increase D) decrease; decrease; decrease Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 45) An increase in the liquidity of corporate bonds will ________ the price of corporate bonds and ________ the yield of Treasury bonds, everything else held constant. A) increase; increase B) reduce; reduce C) increase; reduce D) reduce; increase Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 46) A decrease in the liquidity of corporate bonds will ________ the yield of corporate bonds and ________ the yield of Treasury bonds, everything else held constant. A) increase; increase B) decrease; decrease C) increase; decrease D) decrease; increase Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 47) The risk premium on corporate bonds reflects the fact that corporate bonds have a higher default risk and are ________ U.S. Treasury bonds. A) less liquid than B) less speculative than C) tax-exempt unlike D) lower-yielding than Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking

48) Which of the following statements is TRUE? A) State and local governments cannot default on their bonds. B) Bonds issued by state and local governments are called municipal bonds. C) All government issued bonds—local, state, and federal—are federal income tax exempt. D) The coupon payment on municipal bonds is usually higher than the coupon payment on Treasury bonds. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 49) Everything else held constant, if the tax-exempt status of municipal bonds were eliminated, then A) the interest rates on municipal bonds would still be less than the interest rate on Treasury bonds. B) the interest rate on municipal bonds would equal the rate on Treasury bonds. C) the interest rate on municipal bonds would exceed the rate on Treasury bonds. D) the interest rates on municipal, Treasury, and corporate bonds would all increase. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 50) Municipal bonds have default risk, yet their interest rates are usually lower than the rates on default-free Treasury bonds. This suggests that A) the benefit from the tax-exempt status of municipal bonds is less than their default risk. B) the benefit from the tax-exempt status of municipal bonds equals their default risk. C) the benefit from the tax-exempt status of municipal bonds exceeds their default risk. D) Treasury bonds are not default-free. Answer: C Ques Status: Revised AACSB: Reflective Thinking 51) Everything else held constant, an increase in marginal tax rates would likely have the effect of ________ the demand for municipal bonds, and ________ the demand for U.S. government bonds. A) increasing; increasing B) increasing; decreasing C) decreasing; increasing D) decreasing; decreasing Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking

52) Everything else held constant, a decrease in marginal tax rates would likely have the effect of ________ the demand for municipal bonds, and ________ the demand for U.S. government bonds. A) increasing; increasing B) increasing; decreasing C) decreasing; increasing D) decreasing; decreasing Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 53) Everything else held constant, the interest rate on municipal bonds rises relative to the interest rate on Treasury securities when A) income tax rates are lowered. B) income tax rates are raised. C) municipal bonds become more widely traded. D) corporate bonds become riskier. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 54) Everything else held constant, if income tax rates were lowered, then A) the interest rate on municipal bonds would fall. B) the interest rate on Treasury bonds would rise. C) the interest rate on municipal bonds would rise. D) the price of Treasury bonds would fall. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 55) Everything else held constant, abolishing the individual income tax will A) increase the interest rate on corporate bonds. B) reduce the interest rate on municipal bonds. C) increase the interest rate on municipal bonds. D) increase the interest rate on Treasury bonds. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking

56) Which of the following statements are TRUE? A) An increase in tax rates will increase the demand for Treasury bonds, lowering their interest rates. B) Because the tax-exempt status of municipal bonds was of little benefit to bond holders when tax rates were low, they had higher interest rates than U.S. government bonds before World War II. C) Interest rates on municipal bonds will be higher than comparable bonds without the tax exemption. D) Because coupon payments on municipal bonds are exempt from federal income tax, the expected after-tax return on them will be higher for individuals in lower income tax brackets. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 57) The Obama administration increased the tax on the top income tax bracket from 35% to 39%. Supply and demand analysis predicts the impact of this change was a ________ interest rate on municipal bonds and a ________ interest rate on Treasury bonds, all else the same. A) higher; lower B) lower; lower C) higher; higher D) lower; higher Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 58) Three factors explain the risk structure of interest rates A) liquidity, default risk, and the income tax treatment of a security. B) maturity, default risk, and the income tax treatment of a security. C) maturity, liquidity, and the income tax treatment of a security. D) maturity, default risk, and the liquidity of a security. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 59) If the federal government were to guarantee payment on municipal bonds, the price of municipal bonds would ________ and the yield on U.S. Treasury bonds would ________, all else equal. A) increase; increase B) increase; decrease C) decrease; decrease D) decrease; increase Answer: A Ques Status: New AACSB: Application of Knowledge

60) If the federal government were to guarantee payment on municipal bonds, the yield on municipal bonds would ________ and the yield on U.S. Treasury bonds would ________, all else equal. A) decrease; increase B) increase; increase C) increase; decrease D) decrease; decrease Answer: A Ques Status: New AACSB: Application of Knowledge 61) The spread between the interest rates on Baa corporate bonds and U.S. government bonds is very large during the Great Depression years 1930-1933. Explain this difference using the bond supply and demand analysis. Answer: During the Great Depression many businesses failed. The default risk for the corporate bond increased compared to the default-free Treasury bond. The demand for corporate bonds decreased while the demand for Treasury bonds increased resulting in a larger risk premium. Ques Status: Previous Edition AACSB: Reflective Thinking 62) If the federal government where to raise the income tax rates, would this have any impact on a state's cost of borrowing funds? Explain. Answer: Yes, if the federal government raises income tax rates, demand for municipal bonds which are federal income tax exempt would increase. This would lower the interest rate on the municipal bonds thus lowering the cost to the state of borrowing funds. Ques Status: Previous Edition AACSB: Reflective Thinking

6.2 Term Structure of Interest Rates 1) The term structure of interest rates is A) the relationship among interest rates of different bonds with the same maturity. B) the structure of how interest rates move over time. C) the relationship among the term to maturity of different bonds. D) the relationship among interest rates on bonds with different maturities. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 2) A plot of the interest rates on default-free government bonds with different terms to maturity is called A) a risk-structure curve. B) a default-free curve. C) a yield curve. D) an interest-rate curve. Answer: C Ques Status: Previous Edition AACSB: Application of Knowledge 3) Differences in ________ explain why interest rates on Treasury securities are not all the same. A) risk B) liquidity C) time to maturity D) tax characteristics Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 4) The typical shape for a yield curve is A) gently upward sloping. B) mound shaped. C) flat. D) bowl shaped. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 5) When yield curves are steeply upward sloping A) long-term interest rates are above short-term interest rates. B) short-term interest rates are above long-term interest rates. C) short-term interest rates are about the same as long-term interest rates. D) medium-term interest rates are above both short-term and long-term interest rates. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 16 Copyright © 2019 Pearson Education, Inc.

6) When yield curves are flat A) long-term interest rates are above short-term interest rates. B) short-term interest rates are above long-term interest rates. C) short-term interest rates are about the same as long-term interest rates. D) medium-term interest rates are above both short-term and long-term interest rates. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 7) When yield curves are downward sloping A) long-term interest rates are above short-term interest rates. B) short-term interest rates are above long-term interest rates. C) short-term interest rates are about the same as long-term interest rates. D) medium-term interest rates are above both short-term and long-term interest rates. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 8) An inverted yield curve A) slopes up. B) is flat. C) slopes down. D) has a U shape. Answer: C Ques Status: Previous Edition AACSB: Application of Knowledge 9) Economists' attempts to explain the term structure of interest rates A) illustrate how economists modify theories to improve them when they are inconsistent with the empirical evidence. B) illustrate how economists continue to accept theories that fail to explain observed behavior of interest rate movements. C) prove that the real world is a special case that tends to get short shrift in theoretical models. D) have proved entirely unsatisfactory to date. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking

10) According to the expectations theory of the term structure, the interest rate on a long-term bond will equal the ________ of the short-term interest rates that people expect to occur over the life of the long-term bond. A) average B) sum C) difference D) multiple Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 11) If bonds with different maturities are perfect substitutes, then the ________ on these bonds must be equal. A) expected return B) surprise return C) surplus return D) excess return Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 12) If the expected path of one-year interest rates over the next five years is 4 percent, 5 percent, 7 percent, 8 percent, and 6 percent, then the expectations theory predicts that today's interest rate on the five-year bond is A) 4 percent. B) 5 percent. C) 6 percent. D) 7 percent. Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 13) If the expected path of 1-year interest rates over the next four years is 5 percent, 4 percent, 2 percent, and 1 percent, then the expectations theory predicts that today's interest rate on the fouryear bond is A) 1 percent. B) 2 percent. C) 3 percent. D) 4 percent. Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking

14) If the expected path of 1-year interest rates over the next five years is 1 percent, 2 percent, 3 percent, 4 percent, and 5 percent, the expectations theory predicts that the bond with the highest interest rate today is the one with a maturity of A) two years. B) three years. C) four years. D) five years. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 15) If the expected path of 1-year interest rates over the next five years is 2 percent, 4 percent, 1 percent, 4 percent, and 3 percent, the expectations theory predicts that the bond with the lowest interest rate today is the one with a maturity of A) one year. B) two years. C) three years. D) four years. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 16) Over the next three years, the expected path of 1-year interest rates is 4, 1, and 1 percent. The expectations theory of the term structure predicts that the current interest rate on 3-year bond is A) 1 percent. B) 2 percent. C) 3 percent. D) 4 percent. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 17) According to the expectations theory of the term structure A) the interest rate on long-term bonds will exceed the average of short-term interest rates that people expect to occur over the life of the long-term bonds, because of their preference for shortterm securities. B) interest rates on bonds of different maturities move together over time. C) buyers of bonds prefer short-term to long-term bonds. D) buyers require an additional incentive to hold long-term bonds. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking

18) According to the expectations theory of the term structure A) when the yield curve is steeply upward sloping, short-term interest rates are expected to remain relatively stable in the future. B) when the yield curve is downward sloping, short-term interest rates are expected to remain relatively stable in the future. C) investors have strong preferences for short-term relative to long-term bonds, explaining why yield curves typically slope upward. D) yield curves should be equally likely to slope downward as slope upward. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 19) According to the segmented markets theory of the term structure A) bonds of one maturity are close substitutes for bonds of other maturities, therefore, interest rates on bonds of different maturities move together over time. B) the interest rate for each maturity bond is determined by supply and demand for that maturity bond. C) investors' strong preferences for short-term relative to long-term bonds explains why yield curves typically slope downward. D) because of the positive term premium, the yield curve will not be observed to be downwardsloping. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 20) According to the segmented markets theory of the term structure A) the interest rate on long-term bonds will equal an average of short-term interest rates that people expect to occur over the life of the long-term bonds. B) buyers of bonds do not prefer bonds of one maturity over another. C) interest rates on bonds of different maturities do not move together over time. D) buyers require an additional incentive to hold long-term bonds. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 21) A key assumption in the segmented markets theory is that bonds of different maturities A) are not substitutes at all. B) are perfect substitutes. C) are substitutes only if the investor is given a premium incentive. D) are substitutes but not perfect substitutes. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking

22) The segmented markets theory can explain A) why yield curves usually tend to slope upward. B) why interest rates on bonds of different maturities tend to move together. C) why yield curves tend to slope upward when short-term interest rates are low and to be inverted when short-term interest rates are high. D) why yield curves have been used to forecast business cycles. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 23) According to the liquidity premium theory of the term structure A) because buyers of bonds may prefer bonds of one maturity over another, interest rates on bonds of different maturities do not move together over time. B) the interest rate on long-term bonds will equal an average of short-term interest rates that people expect to occur over the life of the long-term bonds plus a term premium. C) because of the positive term premium, the yield curve will not be observed to be downward sloping. D) the interest rate for each maturity bond is determined by supply and demand for that maturity bond. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 24) According to the liquidity premium theory of the term structure A) bonds of different maturities are not substitutes. B) if yield curves are downward sloping, then short-term interest rates are expected to fall by so much that, even when the positive term premium is added, long-term rates fall below short-term rates. C) yield curves should never slope downward. D) interest rates on bonds of different maturities do not move together over time. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 25) The additional incentive that the purchaser of a Treasury security requires to buy a long-term security rather than a short-term security is called the A) risk premium. B) term premium. C) tax premium. D) market premium. Answer: B Ques Status: Previous Edition AACSB: Application of Knowledge

26) If 1-year interest rates for the next three years are expected to be 1, 1, and 1 percent, and the 3-year term premium is 1 percent, than the 3-year bond rate will be A) 1 percent. B) 2 percent. C) 3 percent. D) 4 percent. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 27) If 1-year interest rates for the next five years are expected to be 4, 2, 5, 4, and 5 percent, and the 5-year term premium is 1 percent, than the 5-year bond rate will be A) 2 percent. B) 3 percent. C) 4 percent. D) 5 percent. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 28) According to the liquidity premium theory of the term structure, a steeply upward sloping yield curve indicates that short-term interest rates are expected to A) rise in the future. B) remain unchanged in the future. C) decline moderately in the future. D) decline sharply in the future. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 29) According to the liquidity premium theory of the term structure, a slightly upward sloping yield curve indicates that short-term interest rates are expected to A) rise in the future. B) remain unchanged in the future. C) decline moderately in the future. D) decline sharply in the future. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking

30) According to the liquidity premium theory of the term structure, a flat yield curve indicates that short-term interest rates are expected to A) rise in the future. B) remain unchanged in the future. C) decline moderately in the future. D) decline sharply in the future. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 31) According to the liquidity premium theory of the term structure, a downward sloping yield curve indicates that short-term interest rates are expected to A) rise in the future. B) remain unchanged in the future. C) decline moderately in the future. D) decline sharply in the future. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 32) According to the liquidity premium theory, a yield curve that is flat means that A) bond purchasers expect interest rates to rise in the future. B) bond purchasers expect interest rates to stay the same. C) bond purchasers expect interest rates to fall in the future. D) the yield curve has nothing to do with expectations of bond purchasers. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 33) If the yield curve is flat for short maturities and then slopes downward for longer maturities, the liquidity premium theory (assuming a mild preference for shorter-term bonds) indicates that the market is predicting A) a rise in short-term interest rates in the near future and a decline further out in the future. B) constant short-term interest rates in the near future and a decline further out in the future. C) a decline in short-term interest rates in the near future and a rise further out in the future. D) a decline in short-term interest rates in the near future and an even steeper decline further out in the future. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking

34) If the yield curve slope is flat for short maturities and then slopes steeply upward for longer maturities, the liquidity premium theory (assuming a mild preference for shorter-term bonds) indicates that the market is predicting A) a rise in short-term interest rates in the near future and a decline further out in the future. B) constant short-term interest rates in the near future and further out in the future. C) a decline in short-term interest rates in the near future and a rise further out in the future. D) constant short-term interest rates in the near future and a decline further out in the future. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 35) If the yield curve has a mild upward slope, the liquidity premium theory (assuming a mild preference for shorter-term bonds) indicates that the market is predicting A) a rise in short-term interest rates in the near future and a decline further out in the future. B) constant short-term interest rates in the near future and further out in the future. C) a decline in short-term interest rates in the near future and a rise further out in the future. D) a decline in short-term interest rates in the near future and an even steeper decline further out in the future. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 36) The preferred habitat theory of the term structure is closely related to the A) expectations theory of the term structure. B) segmented markets theory of the term structure. C) liquidity premium theory of the term structure. D) the inverted yield curve theory of the term structure. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 37) The expectations theory and the segmented markets theory do not explain the facts very well, but they provide the groundwork for the most widely accepted theory of the term structure of interest rates A) the Keynesian theory. B) the separable markets theory. C) the liquidity premium theory. D) the asset market approach. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking

38) The ________ of the term structure of interest rates states that the interest rate on a long-term bond will equal the average of short-term interest rates that individuals expect to occur over the life of the long-term bond, and investors have no preference for short-term bonds relative to long-term bonds. A) segmented markets theory B) expectations theory C) liquidity premium theory D) separable markets theory Answer: B Ques Status: Previous Edition AACSB: Application of Knowledge 39) According to this theory of the term structure, bonds of different maturities are not substitutes for one another. A) segmented markets theory B) expectations theory C) liquidity premium theory D) separable markets theory Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 40) In actual practice, short-term interest rates and long-term interest rates usually move together; this is the major shortcoming of the A) segmented markets theory. B) expectations theory. C) liquidity premium theory. D) separable markets theory. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 41) The ________ of the term structure states the following: the interest rate on a long-term bond will equal an average of short-term interest rates expected to occur over the life of the long-term bond plus a term premium that responds to supply and demand conditions for that bond. A) segmented markets theory B) expectations theory C) liquidity premium theory D) separable markets theory Answer: C Ques Status: Previous Edition AACSB: Application of Knowledge

42) A particularly attractive feature of the ________ is that it tells you what the market is predicting about future short-term interest rates by just looking at the slope of the yield curve. A) segmented markets theory B) expectations theory C) liquidity premium theory D) separable markets theory Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking

43) The steeply upward sloping yield curve in the figure above indicates that A) short-term interest rates are expected to rise in the future. B) short-term interest rates are expected to fall moderately in the future. C) short-term interest rates are expected to fall sharply in the future. D) short-term interest rates are expected to remain unchanged in the future. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 44) The steeply upward sloping yield curve in the figure above indicates that ________ interest rates are expected to ________ in the future. A) short-term; rise B) short-term; fall moderately C) short-term; remain unchanged D) long-term; fall moderately Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking

45) The U-shaped yield curve in the figure above indicates that short-term interest rates are expected to A) rise in the near-term and fall later on. B) fall sharply in the near-term and rise later on. C) fall moderately in the near-term and rise later on. D) remain unchanged in the near-term and rise later on. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 46) The U-shaped yield curve in the figure above indicates that the inflation rate is expected to A) remain constant in the near-term and fall later on. B) fall sharply in the near-term and rise later on. C) rise moderately in the near-term and fall later on. D) remain constant in the near-term and rise later on. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking

47) The mound-shaped yield curve in the figure above indicates that short-term interest rates are expected to A) rise in the near-term and fall later on. B) fall moderately in the near-term and rise later on. C) fall sharply in the near-term and rise later on. D) remain unchanged in the near-term and fall later on. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 48) The mound-shaped yield curve in the figure above indicates that the inflation rate is expected to A) remain constant in the near-term and fall later on. B) fall moderately in the near-term and rise later on. C) rise moderately in the near-term and fall later on. D) remain unchanged in the near-term and rise later on. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 49) An inverted yield curve predicts that short-term interest rates A) are expected to rise in the future. B) will rise and then fall in the future. C) will remain unchanged in the future. D) will fall in the future. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking

50) When short-term interest rates are expected to fall sharply in the future, the yield curve will A) slope up. B) be flat. C) be inverted. D) be an inverted U shape. Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 51) If investors expect interest rates to fall significantly in the future, the yield curve will be inverted. This means that the yield curve has a ________ slope. A) steep upward B) slight upward C) flat D) downward Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 52) When the yield curve is flat or downward-sloping, it suggest that the economy is more likely to enter A) a recession. B) an expansion. C) a boom time. D) a period of increasing output. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 53) A ________ yield curve predicts a future increase in inflation. A) steeply upward sloping B) slight upward sloping C) flat D) downward sloping Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 54) If a higher inflation is expected, what would you expect to happen to the shape of the yield curve? Why? Answer: The yield curve should have a steep upward slope. Nominal interest rates will increase if the inflation rate increases, therefore, bond purchasers will require a higher term premium to hold the riskier long-term bond. Ques Status: Previous Edition AACSB: Reflective Thinking

Economics of Money, Banking, and Financial Markets, 12e (Mishkin) Chapter 7 The Stock Market, the Theory of Rational Expectations, and the Efficient Market Hypothesis 7.1 Computing the Price of Common Stock 1) A stockholder's ownership of a company's stock gives her the right to A) vote and be the primary claimant of all cash flows. B) vote and be the residual claimant of all cash flows. C) manage and assume responsibility for all liabilities. D) vote and assume responsibility for all liabilities. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 2) Stockholders are residual claimants, meaning that they A) have the first priority claim on all of a company's assets. B) are liable for all of a company's debts. C) will never share in a company's profits. D) receive the remaining cash flow after all other claims are paid. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 3) Periodic payments of net earnings to shareholders are known as A) capital gains. B) dividends. C) profits. D) interest. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 4) The value of any investment is found by computing the A) present value of all future sales. B) present value of all future liabilities. C) future value of all future expenses. D) present value of all future cash flows. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking

5) In the one-period valuation model, the value of a share of stock today depends upon A) the present value of both the dividends and the expected sales price. B) only the present value of the future dividends. C) the actual value of the dividends and expected sales price received in one year. D) the future value of dividends and the actual sales price. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 6) In the one-period valuation model, the current stock price increases if A) the expected sales price increases. B) the expected sales price falls. C) the required return increases. D) dividends are cut. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 7) In the one-period valuation model, an increase in the required return on investments in equity A) increases the expected sales price of a stock. B) increases the current price of a stock. C) reduces the expected sales price of a stock. D) reduces the current price of a stock. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 8) In a one-period valuation model, a decrease in the required return on investments in equity causes a(n) ________ in the ________ price of a stock. A) increase; current B) increase; expected sales C) decrease; current D) decrease; expected sales Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 9) Using the one-period valuation model, assuming a year-end dividend of $0.11, an expected sales price of $110, and a required rate of return of 10%, the current price of the stock would be A) $110.11. B) $121.12. C) $100.10. D) $100.11 Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 2 Copyright © 2019 Pearson Education, Inc.

10) Using the one-period valuation model, assuming a year-end dividend of $1.00, an expected sales price of $100, and a required rate of return of 5%, the current price of the stock would be A) $110.00. B) $101.00. C) $100.00. D) $96.19. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 11) In the generalized dividend model, if the expected sales price is in the distant future A) it does not affect the current stock price. B) it is more important than dividends in determining the current stock price. C) it is equally important with dividends in determining the current stock price. D) it is less important than dividends but still affects the current stock price. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 12) In the generalized dividend model, a future sales price far in the future does not affect the current stock price because A) the present value cannot be computed. B) the present value is almost zero. C) the sales price does not affect the current price. D) the stock may never be sold. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 13) In the generalized dividend model, the current stock price is the sum of A) the actual value of the future dividend stream. B) the present value of the future dividend stream. C) the present value of the future dividend stream plus the actual future sales price. D) the present value of the future sales price. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 14) Using the Gordon growth model, a stock's current price will increase if A) the dividend growth rate increases. B) the growth rate of dividends falls. C) the required rate of return on equity rises. D) the expected sales price rises. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 3 Copyright © 2019 Pearson Education, Inc.

15) Using the Gordon growth model, a stock's current price decreases when A) the dividend growth rate increases. B) the required return on equity decreases. C) the expected dividend payment increases. D) the growth rate of dividends decreases. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 16) In the Gordon growth model, a decrease in the required rate of return on equity A) increases the current stock price. B) increases the future stock price. C) reduces the future stock price. D) reduces the current stock price. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 17) Using the Gordon growth formula, if D1 is $2.00, ke is 12% or 0.12, and g is 10% or 0.10, then the current stock price is A) $20. B) $50. C) $100. D) $150. Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 18) Using the Gordon growth formula, if D1 is $1.00, ke is 10% or 0.10, and g is 5% or 0.05, then the current stock price is A) $10. B) $20. C) $30. D) $40. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 19) Using the Gordon growth model, if D1 is $.50, ke is 7%, and g is 5%, then the present value of the stock is A) $2.50. B) $25. C) $50. D) $46.73. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 4 Copyright © 2019 Pearson Education, Inc.

20) One of the assumptions of the Gordon Growth Model is that dividends will continue growing at ________ rate. A) an increasing B) a fast C) a constant D) an escalating Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 21) In the Gordon Growth Model, the growth rate is assumed to be ________ the required return on equity. A) greater than B) equal to C) less than D) proportional to Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 22) A corporation's dividend payment is set by A) its board of directors. B) its debtholders. C) the corporation's CFO (chief financial officer). D) the stockholders themselves. Answer: A Ques Status: New AACSB: Reflective Thinking 23) You believe that a corporation's dividends will grow 5% on average into the foreseeable future. If the company's last dividend payment was $5 what should be the current price of the stock assuming a 12% required return? Answer: Use the Gordon Growth Model. $5(1 + .05)/(.12 - .05) = $75 Ques Status: Previous Edition AACSB: Analytical Thinking 24) What rights does ownership interest give stockholders? Answer: Stockholders have the right to vote on issues brought before the stockholders, be the residual claimant, that is, receive a portion of any net earnings of the corporation, and the right to sell the stock. Ques Status: Previous Edition AACSB: Reflective Thinking

7.2 How the Market Sets Stock Prices 1) In asset markets, an asset's price is A) set equal to the highest price a seller will accept. B) set equal to the highest price a buyer is willing to pay. C) set equal to the lowest price a seller is willing to accept. D) set by the buyer willing to pay the highest price. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 2) Information plays an important role in asset pricing because it allows the buyer to more accurately judge A) liquidity. B) risk. C) capital. D) policy. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 3) New information that might lead to a decrease in a stock's price might be A) an expected decrease in the level of future dividends. B) a decrease in the required rate of return. C) an expected increase in the dividend growth rate. D) an expected increase in the future sales price. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 4) A change in perceived risk of a stock changes A) the expected dividend growth rate. B) the expected sales price. C) the required rate of return. D) the current dividend. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 5) A stock's price will fall if there is A) a decrease in perceived risk. B) an increase in the required rate of return. C) an increase in the future sales price. D) current dividends are high. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 6 Copyright © 2019 Pearson Education, Inc.

6) A monetary expansion ________ stock prices due to a decrease in the ________ and an increase in the ________, everything else held constant. A) reduces; future sales price; expected rate of return B) reduces; current dividend; expected rate of return C) increases; required rate of return; future sales price D) increases; required rate of return; dividend growth rate Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 7) The global financial crisis lead to a decline in stock prices because A) of a lowered expected dividend growth rate. B) of a lowered required return on investment in equity. C) higher expected future stock prices. D) higher current dividends. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 8) Increased uncertainty resulting from the global financial crisis ________ the required return on investment in equity. A) raised B) lowered C) had no impact on D) decreased Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking

7.3 The Theory of Rational Expectations 1) Economists have focused more attention on the formation of expectations in recent years. This increase in interest can probably best be explained by the recognition that A) expectations influence the behavior of participants in the economy and thus have a major impact on economic activity. B) expectations influence only a few individuals, have little impact on the overall economy, but can have important effects on a few markets. C) expectations influence many individuals, have little impact on the overall economy, but can have distributional effects. D) models that ignore expectations have little predictive power, even in the short run. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 2) The view that expectations change relatively slowly over time in response to new information is known in economics as A) rational expectations. B) irrational expectations. C) slow-response expectations. D) adaptive expectations. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 3) If expectations of the future inflation rate are formed solely on the basis of a weighted average of past inflation rates, then economists would say that expectation formation is A) irrational. B) rational. C) adaptive. D) reasonable. Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 4) If expectations are formed adaptively, then people A) use more information than just past data on a single variable to form their expectations of that variable. B) often change their expectations quickly when faced with new information. C) use only the information from past data on a single variable to form their expectations of that variable. D) never change their expectations once they have been made. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking

5) If during the past decade the average rate of monetary growth has been 5% and the average inflation rate has been 5%, everything else held constant, when the Federal Reserve announces that the new rate of monetary growth will be 10%, the adaptive expectation forecast of the inflation rate is A) 5%. B) between 5 and 10%. C) 10%. D) more than 10%. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 6) The major criticism of the view that expectations are formed adaptively is that A) this view ignores that people use more information than just past data to form their expectations. B) it is easier to model adaptive expectations than it is to model rational expectations. C) adaptive expectations models have no predictive power. D) people are irrational and therefore never learn from past mistakes. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 7) In rational expectations theory, the term "optimal forecast" is essentially synonymous with A) correct forecast. B) the correct guess. C) the actual outcome. D) the best guess. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 8) If a forecast is made using all available information, then economists say that the expectation formation is A) rational. B) irrational. C) adaptive. D) reasonable. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking

9) If a forecast made using all available information is NOT perfectly accurate, then it is A) still a rational expectation. B) not a rational expectation. C) an adaptive expectation. D) a second-best expectation. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 10) If expectations are formed rationally, then individuals A) will have a forecast that is 100% accurate all of the time. B) change their forecast when faced with new information. C) use only the information from past data on a single variable to form their forecast. D) have forecast errors that are persistently low. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 11) If additional information is not used when forming an optimal forecast because it is not available at that time, then expectations are A) obviously formed irrationally. B) still considered to be formed rationally. C) formed adaptively. D) formed equivalently. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 12) An expectation may fail to be rational if A) relevant information was not available at the time the forecast is made. B) relevant information is available but ignored at the time the forecast is made. C) information changes after the forecast is made. D) information was available to insiders only. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 13) According to rational expectations theory, forecast errors of expectations A) are more likely to be negative than positive. B) are more likely to be positive than negative. C) tend to be persistently high or low. D) are unpredictable. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking

14) When using rational expectations, forecast errors will, on average, be ________ and ________ be predicted ahead of time. A) positive; can B) positive; cannot C) negative; can D) zero; cannot Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 15) People have a strong incentive to form rational expectations because A) they are guaranteed of success in the stock market. B) it is costly not to do so. C) it is costly to do so. D) everyone wants to be rational. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 16) If market participants notice that a variable behaves differently now than in the past, then, according to rational expectations theory, we can expect market participants to A) change the way they form expectations about future values of the variable. B) begin to make systematic mistakes. C) no longer pay close attention to movements in this variable. D) give up trying to forecast this variable. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 17) According to rational expectations A) expectations of inflation are viewed as being an average of past inflation rates. B) expectations of inflation are viewed as being an average of expected future inflation rates. C) expectations formation indicates that changes in expectations occur slowly over time as past data change. D) expectations will not differ from optimal forecasts using all available information. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking

18) On rainy days, Jennifer's commute time to work averages 45 minutes. Before leaving, Jennifer hears on the radio that a street on her route is closed due to high water. She plans to add an additional 15 minutes to her commute because of the detour. This decision represents A) rational expectations. She is changing her expectations to reflect new information. B) adaptive expectations. She is adapting her plan to what she heard. C) irrational expectations. Everyone knows that radio news is unreliable. D) irrational expectations. She should just call in sick and not get out in the bad weather. Answer: A Ques Status: New AACSB: Reflective Thinking 19) Suppose Barbara looks out in the morning and sees a clear sky so decides that a picnic for lunch is a good idea. Last night the weather forecast included a 100% chance of rain by midday but Barbara did not watch the local news program. Is Barbara's prediction of good weather at lunch time rational? Why or why not? Answer: No, this prediction is not using rational expectations. Although Barbara based her guess on the information that was available to her at the time, additional information was readily available that could have been used to improve her prediction. Ques Status: Previous Edition AACSB: Reflective Thinking 7.4 The Efficient Market Hypothesis: Rational Expectations in Financial Markets 1) The theory of rational expectations, when applied to financial markets, is known as A) monetarism. B) the efficient markets hypothesis. C) the theory of strict liability. D) the theory of impossibility. Answer: B Ques Status: Previous Edition AACSB: Application of Knowledge 2) According to the efficient markets hypothesis, the current price of a financial security A) is the discounted net present value of future interest payments. B) is determined by the lowest successful bidder. C) fully reflects all available relevant information. D) is a result of none of the above. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking

3) If the optimal forecast of the return on a security exceeds the equilibrium return, then A) the market is inefficient. B) no unexploited profit opportunities exist. C) the market is in equilibrium. D) the market is myopic. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 4) Another way to state the efficient markets hypothesis is: in an efficient market A) unexploited profit opportunities will be quickly eliminated. B) unexploited profit opportunities will never exist. C) all prices can be accurately predicted. D) every financial market participant must be well informed about securities. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 5) ________ occurs when market participants observe returns on a security that are larger than what is justified by the characteristics of that security and take action to quickly eliminate the unexploited profit opportunity. A) Arbitrage B) Mediation C) Asset capitalization D) Market intercession Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 6) The efficient markets hypothesis suggests that if an unexploited profit opportunity arises in an efficient market A) it will tend to go unnoticed for some time. B) it will be quickly eliminated. C) financial analysts are your best source of this information. D) all profits will be eliminated through taxation. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 7) Financial markets quickly eliminate unexploited profit opportunities through changes in A) dividend payments. B) tax laws. C) asset prices. D) monetary policy. Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 13 Copyright © 2019 Pearson Education, Inc.

8) The elimination of unexploited profit opportunities requires that ________ market participants be well informed. A) all B) a few C) zero D) many Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 9) If future changes in stock prices are unpredictable, then we say that the stock prices follow a A) random walk. B) straight and narrow path. C) meandering path. D) generalized walk. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 10) When we describe stock prices as following a random walk, we mean that future changes in stock prices are A) unpredictable. B) increasing. C) decreasing. D) constant. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 11) The efficient markets hypothesis implies that future changes in exchange rates should for all practical purposes be A) unpredictable. B) set by each country. C) increasing. D) pegged to a standard such as the U.S. dollar or the Euro. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 12) According to the efficient markets hypothesis, purchasing the reports of financial analysts A) is likely to increase one's returns by an average of 10%. B) is likely to increase one's returns by about 3 to 5%. C) is not likely to be an effective strategy for increasing financial returns. D) is likely to increase one's returns by an average of about 2 to 3%. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 14 Copyright © 2019 Pearson Education, Inc.

13) You have observed that the forecasts of an investment advisor consistently outperform the other reported forecasts. The efficient markets hypothesis says that future forecasts by this advisor A) may or may not be better than the other forecasts. Past performance is no guarantee of the future. B) will always be the best of the group. C) will definitely be worse in the future. What goes up must come down. D) will be worse in the near future, but improve over time. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 14) Which of the following types of information most likely allows the exploitation of a profit opportunity? A) financial analysts' published recommendations B) technical analysis C) hot tips from a stockbroker D) insider information Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 15) Sometimes one observes that the price of a company's stock falls after the announcement of favorable earnings. This phenomenon is A) clearly inconsistent with the efficient markets hypothesis. B) consistent with the efficient markets hypothesis if the earnings were not as high as anticipated. C) consistent with the efficient markets hypothesis if the earnings were not as low as anticipated. D) consistent with the efficient markets hypothesis if the favorable earnings were expected. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 16) You read a story in the newspaper announcing the proposed merger of Dell Computer and Gateway. The merger is expected to greatly increase Gateway's profitability. If you decide to invest in Gateway stock, you can expect to earn A) above average returns since you will share in the higher profits. B) above average returns since your stock price will definitely appreciate as higher profits are earned. C) below average returns since computer makers have low profit rates. D) a normal return since stock prices adjust to reflect expected changes in profitability almost immediately. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking

17) The efficient markets hypothesis indicates that investors A) can use the advice of technical analysts to outperform the market. B) do better on average if they adopt a "buy and hold" strategy. C) let too many unexploited profit opportunities go by if they adopt a "buy and hold" strategy. D) do better if they purchase loaded mutual funds. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 18) The efficient markets hypothesis suggests that investors A) should purchase no-load mutual funds which have low management fees. B) can use the advice of technical analysts to outperform the market. C) let too many unexploited profit opportunities go by if they adopt a "buy and hold" strategy. D) act on all "hot tips" they hear. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 19) The advantage of a "buy-and-hold strategy" is that A) net profits will tend to be higher because there will be fewer brokerage commissions. B) losses will eventually be eliminated. C) the longer a stock is held, the higher will be its price. D) profits are guaranteed. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 20) For small investors, the best way to pursue a "buy and hold" strategy is to A) buy and sell individual stocks frequently. B) buy no-load mutual funds with high management fees. C) buy no-load mutual funds with low management fees. D) buy load mutual funds. Answer: C Ques Status: Previous Edition AACSB: Application of Knowledge

21) Does the efficient markets hypothesis imply that the average investor will not earn anything by purchasing stock? A) No, the efficient market hypothesis implies that the average investor should not expect to receive abnormally high returns on a consistent basis. B) Yes, the efficient markets hypothesis implies that the best that the average investor can do is break even. C) No, the efficient market hypothesis implies that the investor will consistently earn abnormally high returns by purchasing stock. D) Yes, the efficient markets hypothesis implies that stock purchases are extremely risky and that the average investor has no hope of recovering any loss. Answer: A Ques Status: New AACSB: Reflective Thinking 22) If a corporation announces that it expects quarterly earnings to increase by 25% and it actually sees an increase of 22%, what should happen to the price of the corporation's stock if the efficient markets hypothesis holds, everything else held constant? Answer: The stock's price should fall. The price had adjusted based on the statement of expected earnings. When the actual number turned out to be lower than expected, the stock price changes to reflect the additional information. Ques Status: Previous Edition AACSB: Reflective Thinking 23) Your best friend calls and gives you the latest stock market "hot tip" that he heard at the health club. Should you act on this information? Why or why not? Answer: No, if this information is readily available, it will already be reflected in the stock price. Ques Status: Previous Edition AACSB: Reflective Thinking

7.5 Why the Efficient Market Hypothesis Does Not Imply That Financial Markets are Efficient 1) If in an efficient market all prices are correct and reflect market fundamentals, which of the following is a FALSE statement? A) A stock that has done poorly in the past is more likely to do well in the future. B) One investment is as good as any other because the securities' prices are correct. C) A security's price reflects all available information about the intrinsic value of the security. D) Security prices can be used by managers to assess their cost of capital accurately. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 2) The efficient markets hypothesis implies that prices in the stock market A) follow a definite pattern. B) are more likely to go up than down. C) always undervalue the true assets of a corporation. D) are unpredictable. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 3) Stock market crashes lead us to believe that A) factors other than market fundamentals have an effect on asset prices. B) unexploited profit opportunities never exist. C) crashes are always predictable when market participants behave rationally. D) bubbles are a natural outcome of an efficient market. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge

7.6 Behavioral Finance 1) ________ is the field of study that applies concepts from social sciences such as psychology and sociology to help understand the behavior of securities prices. A) Behavioral finance B) Strategical finance C) Methodical finance D) Procedural finance Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 2) If a market participant believes that a stock price is irrationally high, they may try to borrow stock from brokers to sell in the market and then make a profit by buying the stock back again after the stock falls in price. This practice is called A) short selling. B) double dealing. C) undermining. D) long marketing. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 3) ________ means people are more unhappy when they suffer losses than they are happy when they achieve gains. A) Loss fundamentals B) Loss aversion C) Loss leader D) Loss cycle Answer: B Ques Status: Previous Edition AACSB: Application of Knowledge 4) Loss aversion can explain why very little ________ actually takes place in the securities market. A) short selling B) bargaining C) bartering D) negotiating Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking

5) Psychologists have found that people tend to be ________ in their own judgments. A) underconfident B) overconfident C) indecisive D) insecure Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 6) ________ and ________ may provide an explanation for stock market bubbles. A) Overconfidence; social contagion B) Underconfidence; social contagion C) Overconfidence; social isolationism D) Underconfidence; social isolationism Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 7) Investors tend to trade on their beliefs rather than on pure facts. This statement might explain why securities markets have ________ that the efficient market hypothesis does not predict. A) such a large trading volume B) short sales C) a random walk D) arbitrage Answer: A Ques Status: New AACSB: Application of Knowledge

7.7 Web Appendix: Evidence on the Efficient Market Hypothesis 1) If a mutual fund outperforms the market in one period, evidence suggests that this fund is A) highly likely to consistently outperform the market in subsequent periods due to its superior investment strategy. B) likely to under-perform the market in subsequent periods to average its overall returns. C) not likely to consistently outperform the market in subsequent periods. D) not likely to outperform the market in any subsequent period. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 2) Studies of mutual fund performance indicate that mutual funds that outperformed the market in one time period usually A) beat the market in the next time period. B) beat the market in the next two subsequent time periods. C) beat the market in the next three subsequent time periods. D) do not beat the market in the next time period. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 3) The number and availability of discount brokers has grown rapidly since the mid-1970s. The efficient markets hypothesis predicts that people who use discount brokers A) will likely earn lower returns than those who use full-service brokers. B) will likely earn about the same as those who use full-service brokers, but will net more after brokerage commissions. C) are going against evidence suggesting that full-service brokers can help outperform the market. D) are likely to outperform the market by a wide margin. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 4) When Happy Feet Corporation announces that their fourth quarter earnings are up 10%, their stock price falls. This is consistent with the efficient markets hypothesis A) if earnings were not as high as expected. B) if earnings were not as low as expected. C) if a merger is anticipated. D) the company just invented a new bunion product. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking

5) To say that stock prices follow a "random walk" is to argue that stock prices A) rise, then fall, then rise again. B) rise, then fall in a predictable fashion. C) tend to follow trends. D) cannot be predicted based on past trends. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 6) The efficient markets hypothesis predicts that stock prices follow a "random walk." The implication of this hypothesis for investing in stocks is A) a "churning strategy" of buying and selling often to catch market swings. B) turning over your stock portfolio each month, selecting stocks by throwing darts at the stock page. C) a "buy and hold strategy" of holding stocks to avoid brokerage commissions. D) following the advice of technical analysts. Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 7) Rules used to predict movements in stock prices based on past patterns are, according to the efficient markets hypothesis A) a waste of time. B) profitably employed by all financial analysts. C) the most efficient rules to employ. D) consistent with the random walk hypothesis. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 8) Tests used to rate the performance of rules developed in technical analysis conclude that technical analysis A) outperforms the overall market. B) far outperforms the overall market, suggesting that stockbrokers provide valuable services. C) does not outperform the overall market. D) does not outperform the overall market, suggesting that stockbrokers do not provide services of any value. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking

9) Which of the following accurately summarize the empirical evidence about technical analysis? A) Technical analysts fare no better than other financial analysis—on average they do not outperform the market. B) Technical analysts tend to outperform other financial analysis, but on average they nevertheless under-perform the market. C) Technical analysts fare no better than other financial analysis, and like other financial analysts they outperform the market. D) Technical analysts fare no better than other financial analysis, and like other financial analysts they under-perform the market. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 10) The small-firm effect refers to the A) negative returns earned by small firms. B) returns equal to large firms earned by small firms. C) abnormally high returns earned by small firms. D) low returns after adjusting for risk earned by small firms. Answer: C Ques Status: Previous Edition AACSB: Application of Knowledge 11) The January effect refers to the fact that A) most stock market crashes have occurred in January. B) stock prices tend to fall in January. C) stock prices have historically experienced abnormal price increases in January. D) the football team winning the Super Bowl accurately predicts the behavior of the stock market for the next year. Answer: C Ques Status: Previous Edition AACSB: Application of Knowledge 12) When a corporation announces a major decline in earnings, the stock price may initially decline significantly and then rise back to normal levels over the next few weeks. This impact is called A) the January effect. B) mean reversion. C) market overreaction. D) the small-firm effect. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking

13) A phenomenon closely related to market overreaction is A) the random walk. B) the small-firm effect. C) the January effect. D) excessive volatility. Answer: D Ques Status: Previous Edition AACSB: Application of Knowledge 14) Excessive volatility refers to the fact that A) stock returns display mean reversion. B) stock prices can be slow to react to new information. C) stock price tend to rise in the month of January. D) stock prices fluctuate more than is justified by dividend fluctuations. Answer: D Ques Status: Previous Edition AACSB: Application of Knowledge 15) Mean reversion refers to the fact that A) small firms have higher than average returns. B) stocks that have had low returns in the past are more likely to do well in the future. C) stock returns are high during the month of January. D) stock prices fluctuate more than is justified by fundamentals. Answer: B Ques Status: Previous Edition AACSB: Application of Knowledge 16) Evidence in support of the efficient markets hypothesis includes A) the failure of technical analysis to outperform the market. B) the small-firm effect. C) the January effect. D) excessive volatility. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 17) Evidence against market efficiency includes A) failure of technical analysis to outperform the market. B) the random walk behavior of stock prices. C) the inability of mutual fund managers to consistently beat the market. D) the January effect. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking

Economics of Money, Banking, and Financial Markets, 12e (Mishkin) Chapter 8 An Economic Analysis of Financial Structure 8.1 Basic Facts About Financial Structure Throughout the World 1) American businesses get their external funds primarily from A) bank loans. B) bonds and commercial paper issues. C) stock issues. D) loans from nonbank financial intermediaries. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 2) Of the sources of external funds for nonfinancial businesses in the United States, loans from banks and other financial intermediaries account for approximately ________ of the total. A) 6% B) 40% C) 56% D) 60% Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 3) Of the sources of external funds for nonfinancial businesses in the United States, corporate bonds and commercial paper account for approximately ________ of the total. A) 5% B) 10% C) 32% D) 50% Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 4) Of the following sources of external finance for American nonfinancial businesses, the least important is A) loans from banks. B) stocks. C) bonds and commercial paper. D) loans from other financial intermediaries. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking

5) Of the sources of external funds for nonfinancial businesses in the United States, stocks account for approximately ________ of the total. A) 2% B) 11% C) 20% D) 40% Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 6) Of the four sources of external funding for nonfinancial businesses, the least often used in the U.S. is A) bank loans. B) nonbank loans. C) bonds. D) stock. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 7) Which of the following statements concerning external sources of financing for nonfinancial businesses in the United States are TRUE? A) Stocks are a far more important source of finance than are bonds. B) Stocks and bonds, combined, supply less than one-half of the external funds. C) Financial intermediaries are the least important source of external funds for businesses. D) Since 1970, more than half of the new issues of stock have been sold to American households. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 8) Which of the following statements concerning external sources of financing for nonfinancial businesses in the United States are TRUE? A) Issuing marketable securities is the primary way that they finance their activities. B) Bonds are the least important source of external funds to finance their activities. C) Stocks are a relatively unimportant source of finance for their activities. D) Selling bonds directly to the American household is a major source of funding for American businesses. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking

9) With regard to external sources of financing for nonfinancial businesses in the United States, which of the following are accurate statements? A) Marketable securities account for a larger share of external business financing in the United States than in Germany and Japan. B) Since 1970, most of the newly issued corporate bonds and commercial paper have been sold directly to American households. C) Direct finance accounts for more than 50 percent of the external financing of American businesses. D) Smaller businesses almost always raise funds by issuing marketable securities. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 10) Nonfinancial businesses in Germany, Japan, and Canada raise most of their funds A) by issuing stock. B) by issuing bonds. C) from nonbank loans. D) from bank loans. Answer: D Ques Status: Previous Edition AACSB: Application of Knowledge 11) As a source of funds for nonfinancial businesses, stocks are relatively more important in A) the United States. B) Germany. C) Japan. D) Canada. Answer: D Ques Status: Previous Edition AACSB: Application of Knowledge 12) Direct finance involves the sale to ________ of marketable securities such as stocks and bonds. A) households B) insurance companies C) pension funds D) financial intermediaries Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge

13) Regulation of the financial system A) occurs only in the United States. B) protects the jobs of employees of financial institutions. C) protects the wealth of owners of financial institutions. D) ensures the stability of the financial system. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 14) One purpose of regulation of financial markets is to A) limit the profits of financial institutions. B) increase competition among financial institutions. C) promote the provision of information to shareholders, depositors and the public. D) guarantee that the maximum rates of interest are paid on deposits. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 15) Property that is pledged to the lender in the event that a borrower cannot make his or her debt payment is called A) collateral. B) points. C) interest. D) good faith money. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 16) Collateralized debt is also know as A) unsecured debt. B) secured debt. C) unrestricted debt. D) promissory debt. Answer: B Ques Status: Previous Edition AACSB: Application of Knowledge 17) Credit card debt is A) secured debt. B) unsecured debt. C) restricted debt. D) unrestricted debt. Answer: B Ques Status: Previous Edition AACSB: Application of Knowledge

18) The predominant form of household debt is A) consumer installment debt. B) collateralized debt. C) unsecured debt. D) unrestricted debt. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 19) If you default on your auto loan, your car will be repossessed because it has been pledged as ________ for the loan. A) interest B) collateral C) dividend D) commodity Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 20) Commercial and farm mortgages, in which property is pledged as collateral, account for A) one-quarter of borrowing by nonfinancial businesses. B) one-half of borrowing by nonfinancial businesses. C) one-twentieth of borrowing by nonfinancial businesses. D) two-thirds of borrowing by nonfinancial businesses. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 21) A ________ is a provision that restricts or specifies certain activities that a borrower can engage in. A) residual claimant B) risk hedge C) restrictive barrier D) restrictive covenant Answer: D Ques Status: Previous Edition AACSB: Application of Knowledge 22) A clause in a mortgage loan contract requiring the borrower to purchase homeowner's insurance is an example of a A) proscriptive covenant. B) prescriptive covenant. C) restrictive covenant. D) constraint-imposed covenant. Answer: C Ques Status: Previous Edition AACSB: Application of Knowledge 5 Copyright © 2019 Pearson Education, Inc.

23) Which of the following is NOT one of the eight basic puzzles about financial structure? A) Stocks are the most important source of finance for American businesses. B) Issuing marketable securities is not the primary way businesses finance their operations. C) Indirect finance, which involves the activities of financial intermediaries, is many times more important than direct finance, in which businesses raise funds directly from lenders in financial markets. D) Banks are the most important source of external funds to finance businesses. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 24) Which of the following is NOT one of the eight basic puzzles about financial structure? A) Debt contracts are typically extremely complicated legal documents that place substantial restrictions on the behavior of the borrower. B) Indirect finance, which involves the activities of financial intermediaries, is many times more important than direct finance, in which businesses raise funds directly from lenders in financial markets. C) Collateral is a prevalent feature of debt contracts for both households and business. D) There is very little regulation of the financial system. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 8.2 Transaction Costs 1) The current structure of financial markets can be best understood as the result of attempts by financial market participants to A) adapt to continually changing government regulations. B) deal with the great number of small firms in the United States. C) reduce transaction costs. D) cartelize the provision of financial services. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 2) The reduction in transactions costs per dollar of investment as the size of transactions increases is A) discounting. B) economies of scale. C) economies of trade. D) diversification. Answer: B Ques Status: Previous Edition AACSB: Application of Knowledge

3) By bundling share purchases of many investors together mutual funds can take advantage of economies of scale and thereby lower A) adverse selection. B) moral hazard. C) transactions costs. D) diversification. Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 4) Which of the following is NOT a benefit to an individual purchasing a mutual fund? A) reduced risk B) lower transactions costs C) free-riding D) diversification Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 5) Financial intermediaries develop ________ in things such as computer technology which allows them to lower transactions costs. A) expertise B) diversification C) regulations D) equity Answer: A Ques Status: Previous Edition AACSB: Information Technology 6) Financial intermediaries' low transaction costs allow them to provide ________ services that make it easier for customers to conduct transactions. A) liquidity B) conduction C) transcendental D) equitable Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 7) How does a mutual fund lower transactions costs through economies of scale? Answer: The mutual fund takes the funds of the individuals who have purchased shares and uses them to purchase bonds or stocks. Because the mutual fund will be purchasing large blocks of stocks or bonds they will be able to obtain them at lower transactions costs than the individual purchases of smaller amounts could. Ques Status: Previous Edition AACSB: Reflective Thinking 7 Copyright © 2019 Pearson Education, Inc.

8.3 Asymmetric Information: Adverse Selection and Moral Hazard 1) A borrower who takes out a loan usually has better information about the potential returns and risk of the investment projects he plans to undertake than does the lender. This inequality of information is called A) moral hazard. B) asymmetric information. C) noncollateralized risk. D) adverse selection. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 2) The presence of ________ in financial markets leads to adverse selection and moral hazard problems that interfere with the efficient functioning of financial markets. A) noncollateralized risk B) free-riding C) asymmetric information D) costly state verification Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 3) The problem created by asymmetric information before the transaction occurs is called ________, while the problem created after the transaction occurs is called ________. A) adverse selection; moral hazard B) moral hazard; adverse selection C) costly state verification; free-riding D) free-riding; costly state verification Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 4) If bad credit risks are the ones who most actively seek loans then financial intermediaries face the problem of A) moral hazard. B) adverse selection. C) free-riding. D) costly state verification. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking

5) The problem faced by the lender that the borrower may take on additional risk after receiving the loan is called A) adverse selection. B) moral hazard. C) transactions costs. D) diversification. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 6) An example of the ________ problem would be if Brian borrowed money from Sean in order to purchase a used car and instead took a trip to Atlantic City using those funds. A) moral hazard B) adverse selection C) costly state verification D) agency Answer: A Ques Status: Previous Edition AACSB: Ethical Understanding and Reasoning Abilities 7) The analysis of how asymmetric information problems affect economic behavior is called ________ theory. A) uneven B) parallel C) principal D) agency Answer: D Ques Status: Previous Edition AACSB: Application of Knowledge

8.4 The Lemons Problem: How Adverse Selection Influences Financial Structure 1) The "lemons problem" exists because of A) transactions costs. B) economies of scale. C) rational expectations. D) asymmetric information. Answer: D Ques Status: Previous Edition AACSB: Application of Knowledge 2) Because of the "lemons problem" the price a buyer of a used car pays is A) equal to the price of a lemon. B) less than the price of a lemon. C) equal to the price of a peach. D) between the price of a lemon and a peach. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 3) Adverse selection is a problem associated with equity and debt contracts arising from A) the lender's relative lack of information about the borrower's potential returns and risks of his investment activities. B) the lender's inability to legally require sufficient collateral to cover a 100% loss if the borrower defaults. C) the borrower's lack of incentive to seek a loan for highly risky investments. D) the lender's inability to restrict the borrower from changing his behavior once given a loan. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 4) The ________ problem helps to explain why the private production and sale of information cannot eliminate ________. A) free-rider; adverse selection B) free-rider; moral hazard C) principal-agent; adverse selection D) principal-agent; moral hazard Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking

5) The free-rider problem occurs because A) people who pay for information use it freely. B) people who do not pay for information use it. C) information can never be sold at any price. D) it is never profitable to produce information. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 6) In the United States, the government agency requiring that firms that sell securities in public markets adhere to standard accounting principles and disclose information about their sales, assets, and earnings is the A) Federal Communications Commission. B) Federal Trade Commission. C) Securities and Exchange Commission. D) Federal Reserve System. Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 7) Government regulations require publicly traded firms to provide information, reducing A) transactions costs. B) the need for diversification. C) the adverse selection problem. D) economies of scale. Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 8) A lesson of the Enron collapse is that government regulation A) always fails. B) can reduce but not eliminate asymmetric information problems. C) increases the problem of asymmetric information. D) should be reduced. Answer: B Ques Status: Revised AACSB: Reflective Thinking

9) That most used cars are sold by intermediaries (i.e., used car dealers) provides evidence that these intermediaries A) have been afforded special government treatment, since used car dealers do not provide information that is valued by consumers of used cars. B) are able to prevent potential competitors from free-riding off the information that they provide. C) have failed to solve adverse selection problems in this market because "lemons" continue to be traded. D) have solved the moral hazard problem by providing valuable information to their customers. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 10) Analysis of adverse selection indicates that financial intermediaries, especially banks A) have advantages in overcoming the free-rider problem, helping to explain why indirect finance is a more important source of business finance than is direct finance. B) despite their success in overcoming free-rider problems, nevertheless play a minor role in moving funds to corporations. C) provide better-known and larger corporations a higher percentage of their external funds than they do to newer and smaller corporations which rely to a greater extent on the new issues market for funds. D) must buy securities from corporations to diversify the risk that results from holding nontradable loans. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 11) The concept of adverse selection helps to explain all of the following EXCEPT A) why firms are more likely to obtain funds from banks and other financial intermediaries, rather than from the securities markets. B) why indirect finance is more important than direct finance as a source of business finance. C) why direct finance is more important than indirect finance as a source of business finance. D) why the financial system is so heavily regulated. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 12) As information technology improves, the lending role of financial institutions such as banks should A) increase somewhat. B) decrease. C) stay the same. D) increase significantly. Answer: B Ques Status: Previous Edition AACSB: Information Technology 12 Copyright © 2019 Pearson Education, Inc.

13) External financing by ________ should be more important in developing countries than in industrialized countries because information about private firms is more difficult to collect in developing countries. A) financial intermediaries B) bonds C) stock D) direct lending Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 14) That only large, well-established corporations have access to securities markets A) explains why indirect finance is such an important source of external funds for businesses. B) can be explained by the problem of moral hazard. C) can be explained by government regulations that prohibit small firms from acquiring funds in securities markets. D) explains why newer and smaller corporations rely so heavily on the new issues market for funds. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 15) Because of the adverse selection problem A) good credit risks are more likely to seek loans causing lenders to make a disproportionate amount of loans to good credit risks. B) lenders may refuse loans to individuals with high net worth, because of their greater proclivity to "skip town." C) lenders are reluctant to make loans that are not secured by collateral. D) lenders will write debt contracts that restrict certain activities of borrowers. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 16) Net worth can perform a similar role to A) diversification. B) collateral. C) intermediation. D) economies of scale. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking

17) The problem of adverse selection helps to explain A) why firms are more likely to obtain funds from banks and other financial intermediaries, rather than from securities markets. B) why collateral is an important feature of consumer, but not business, debt contracts. C) why direct finance is more important than indirect finance as a source of business finance. D) why lenders refuse loans to individuals with high net worth. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 18) The concept of adverse selection helps to explain A) why collateral is not a common feature of many debt contracts. B) why large, well-established corporations find it so difficult to borrow funds in securities markets. C) why financial markets are among the most heavily regulated sectors of the economy. D) why stocks are the most important source of external financing for businesses. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 19) Tools to help solve the adverse selection problem in financial markets include all of the following EXCEPT A) diversification. B) government regulations to increase information. C) the use of financial intermediaries. D) the private production and sale of information. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 20) The statement "Only the people who don't need money can borrow it!" can be explained by the concept of A) adverse selection. B) moral hazard. C) direct finance. D) costly state verification. Answer: A Ques Status: New AACSB: Reflective Thinking 21) How does collateral help to reduce the adverse selection problem in credit market? Answer: Collateral is property that is promised to the lender if the borrower defaults thus reducing the lender's losses. Lenders are more willing to make loans when there is collateral that can be sold if the borrower defaults. Ques Status: Previous Edition AACSB: Reflective Thinking 14 Copyright © 2019 Pearson Education, Inc.

8.5 How Moral Hazard Affects the Choice Between Debt and Equity Contracts 1) Equity contracts A) are claims to a share in the profits and assets of a business. B) have the advantage over debt contracts of a lower costly state verification. C) are used much more frequently to raise capital than are debt contracts. D) are not subject to the moral hazard problem. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 2) A problem for equity contracts is a particular type of ________ called the ________ problem. A) adverse selection; principal-agent B) moral hazard; principal-agent C) adverse selection; free-rider D) moral hazard; free-rider Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 3) Moral hazard in equity contracts is known as the ________ problem because the manager of the firm has fewer incentives to maximize profits than the stockholders might ideally prefer. A) principal-agent B) adverse selection C) free-rider D) debt deflation Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 4) Managers (________) may act in their own interest rather than in the interest of the stockholder-owners (________) because the managers have less incentive to maximize profits than the stockholder-owners do. A) principals; agents B) principals; principals C) agents; agents D) agents; principals Answer: D Ques Status: Previous Edition AACSB: Ethical Understanding and Reasoning Abilities

5) The principal-agent problem A) occurs when managers have more incentive to maximize profits than the stockholders-owners do. B) in financial markets helps to explain why equity is a relatively important source of finance for American business. C) would not arise if the owners of the firm had complete information about the activities of the managers. D) explains why direct finance is more important than indirect finance as a source of business finance. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 6) The principal-agent problem would not occur if ________ of a firm had complete information about actions of the ________. A) owners; customers B) owners; managers C) managers; customers D) managers; owners Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 7) The recent Enron and Tyco International scandals are an example of A) the free-rider problem. B) the adverse selection problem. C) the principal-agent problem. D) the "lemons problem." Answer: C Ques Status: Revised AACSB: Ethical Understanding and Reasoning Abilities 8) The name economists give the process by which stockholders gather information by frequent monitoring of the firm's activities is A) costly state verification. B) the free-rider problem. C) costly avoidance. D) debt intermediation. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge

9) Because information is scarce A) helps explain why equity contracts are used so much more frequently to raise capital than are debt contracts. B) monitoring managers gives rise to costly state verification. C) government regulations, such as standard accounting principles, have no impact on problems such as moral hazard. D) developing nations do not rely heavily on banks for business financing. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 10) Government regulations designed to reduce the moral hazard problem include A) laws that force firms to adhere to standard accounting principles. B) light sentences for those who commit the fraud of hiding and stealing profits. C) state verification subsidies. D) state licensing restrictions. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 11) One financial intermediary in our financial structure that helps to reduce the moral hazard from arising from the principal-agent problem is the A) venture capital firm. B) money market mutual fund. C) pawn broker. D) savings and loan association. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 12) A venture capital firm protects its equity investment from moral hazard through which of the following means? A) It places people on the board of directors to better monitor the borrowing firm's activities. B) It writes contracts that prohibit the sale of an equity investment to the venture capital firm. C) It prohibits the borrowing firm from replacing its management. D) It requires a 50% stake in the company. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking

13) One way the venture capital firm avoids the free-rider problem is by A) prohibiting the sale of equity in the firm to anyone except the venture capital firm. B) prohibiting members from serving on the board of directors. C) prohibiting the borrowing firm from replacing management. D) requiring collateral equal to the value of the borrowed funds. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 14) Equity contracts account for a small fraction of external funds raised by American businesses because A) costly state verification makes the equity contract less desirable than the debt contract. B) of the reduced scope for moral hazard problems under equity contracts, as compared to debt contracts. C) equity contracts do not permit borrowing firms to raise additional funds by issuing debt. D) there is no moral hazard problem when using a debt contract. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 15) Debt contracts A) are agreements by the borrowers to pay the lenders fixed dollar amounts at periodic intervals. B) have a higher cost of state verification than equity contracts. C) are used less frequently to raise capital than are equity contracts. D) never result in a loss for the lender. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 16) Since they require less monitoring of firms, ________ contracts are used more frequently than ________ contracts to raise capital. A) debt; equity B) equity; debt C) debt; loan D) equity; stock Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 17) Solutions to the moral hazard in equity contracts include all of the following EXCEPT A) government regulations to increase information. B) the use of financial intermediaries. C) the use of debt contracts. D) government ownership of resources. Answer: D Ques Status: Previous Edition AACSB: Application of Knowledge 18 Copyright © 2019 Pearson Education, Inc.

18) Explain the principal-agent problem as it pertains to equity contracts. Answer: The principals are the stockholders who own most of the equity. The agents are the managers of the firm who generally own only a small portion of the firm. The problem occurs because the agents may not have as much incentive to profit maximize as the stockholders. Ques Status: Previous Edition AACSB: Reflective Thinking 8.6 How Moral Hazard Influences Financial Structure in Debt Markets 1) Although debt contracts require less monitoring than equity contracts, debt contracts are still subject to ________ since borrowers have an incentive to take on more risk than the lender would like. A) moral hazard B) agency theory C) diversification D) the "lemons" problem Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 2) A debt contract is incentive compatible A) if the borrower has the incentive to behave in the way that the lender expects and desires, since doing otherwise jeopardizes the borrower's net worth in the business. B) if the borrower's net worth is sufficiently low so that the lender's risk of moral hazard is significantly reduced. C) if the debt contract is treated like an equity. D) if the lender has the incentive to behave in the way that the borrower expects and desires. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 3) High net worth helps to diminish the problem of moral hazard problem by A) requiring the state to verify the debt contract. B) collateralizing the debt contract. C) making the debt contract incentive compatible. D) giving the debt contract characteristics of equity contracts. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking

4) One way of describing the solution that high net worth provides to the moral hazard problem is to say that it A) collateralizes the debt contract. B) makes the debt contract incentive compatible. C) state verifies the debt contract. D) removes all of the risk in the debt contract. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 5) A clause in a debt contract requiring that the borrower purchase insurance against loss of the asset financed with the loan is called a A) collateral-insurance clause. B) prescription covenant. C) restrictive covenant. D) proscription covenant. Answer: C Ques Status: Previous Edition AACSB: Application of Knowledge 6) Professional athletes often have contract clauses prohibiting risky activities such as skiing and motorcycle riding. These clauses are A) limited-liability clauses. B) risk insurance. C) restrictive covenants. D) illegal. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 7) For restrictive covenants to help reduce the moral hazard problem, they must be ________ by the lender. A) monitored and enforced B) written in all capitals C) easily changed D) impossible to remove Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge

8) Although restrictive covenants can potentially reduce moral hazard, a problem with restrictive covenants is that A) borrowers may find loopholes that make the covenants ineffective. B) they are inexpensive to monitor and enforce. C) too many resources may be devoted to monitoring and enforcing them, as debtholders duplicate others' monitoring and enforcement efforts. D) they reduce the value of the debt contract. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 9) Solutions to the moral hazard problem include A) low net worth. B) monitoring and enforcement of restrictive covenants. C) greater reliance on equity contracts and less on debt contracts. D) greater reliance on debt contracts than financial intermediaries. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 10) A key finding of the economic analysis of financial structure is that A) the existence of the free-rider problem for traded securities helps to explain why banks play a predominant role in financing the activities of businesses. B) while free-rider problems limit the extent to which securities markets finance some business activities, nevertheless the majority of funds going to businesses are channeled through securities markets. C) given the great extent to which securities markets are regulated, free-rider problems are not of significant economic consequence in these markets. D) economists do not have a very good explanation for why securities markets are so heavily regulated. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 11) One possible reason for slower growth in developing and transition countries is A) capital may not be directed to its most productive use. B) strict accounting standards are too stringent for the banks to meet. C) the weak link between government and financial intermediaries. D) the lack of adverse selection and moral hazard problems. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge

12) One reason financial systems in developing and transition countries are underdeveloped is A) they have weak links to their governments. B) they make loans only to nonprofit entities. C) the legal system may be poor making it difficult to enforce restrictive covenants. D) the accounting standards are too stringent for the banks to meet. Answer: C Ques Status: Previous Edition AACSB: Application of Knowledge 13) Because of the weak systems of property rights in many developing and transition economies, the financial system is unable to use collateral effectively worsening the ________ problem. A) adverse selection B) moral hazard C) principal/agent D) diversification Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 14) In developing countries, it can be expensive and time-consuming for the poor to legalize their property ownership. Without legal title, the property cannot be used as ________ to borrow funds. A) collateral B) points C) interest D) restrictive covenants Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 15) One reason China has been able to grow so rapidly even though its financial development is still in its early stages is A) the high savings rate of around 40%. B) the shift of labor to the agricultural sector. C) the stringent enforcement of financial contracts. D) the ease of obtaining high-quality information about creditors. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge

16) The high growth rate in China in the last twenty years has similarities to the high growth rate of ________ during the 1950s and 1960s. A) the United States B) the Soviet Union C) Brazil D) Mexico Answer: B Ques Status: Previous Edition AACSB: Application of Knowledge 17) In many developing and transition countries, commercial banks are owned by their governments. These ________ may have little incentive to allocate their capital to the most productive uses. A) state-owned banks B) central banks C) national banks D) federal banks Answer: A Ques Status: New AACSB: Analytical Thinking 18) The primary loan customer of state-owned banks in developing and transition economies is often A) the government that owns the institutions. B) the neediest businesses in the economy. C) the start-up companies that will provide job growth. D) outside corporations that see this as an opportunity to borrow at low rates. Answer: A Ques Status: New AACSB: Analytical Thinking 19) Why does the free-rider problem occur in the debt market? Answer: Restrictive covenants can reduce moral hazard but they must be monitored and enforced to be effective. If bondholders know that other bondholders are monitoring and enforcing the restrictive covenants, they can free ride. Other bondholders will follow suit resulting in not enough resources devoted to monitoring and enforcing restrictive covenants. Ques Status: Previous Edition AACSB: Reflective Thinking

Economics of Money, Banking, and Financial Markets, 12e (Mishkin) Chapter 9 Banking and the Management of Financial Institutions 9.1 The Bank Balance Sheet 1) Which of the following statements are TRUE? A) A bank's assets are its sources of funds. B) A bank's liabilities are its uses of funds. C) A bank's balance sheet shows that total assets equal total liabilities plus equity capital. D) A bank's balance sheet indicates whether or not the bank is profitable. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 2) Which of the following statements is FALSE? A) A bank's assets are its uses of funds. B) A bank issues liabilities to acquire funds. C) The bank's assets provide the bank with income. D) Bank capital is recorded as an asset on the bank balance sheet. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 3) Which of the following are reported as liabilities on a bank's balance sheet? A) reserves B) checkable deposits C) consumer loans D) deposits with other banks Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 4) Which of the following are reported as liabilities on a bank's balance sheet? A) discount loans B) reserves C) U.S. Treasury securities D) real estate loans Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking

5) The share of checkable deposits in total bank liabilities has A) expanded moderately over time. B) expanded dramatically over time. C) shrunk over time. D) remained virtually unchanged since 1960. Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 6) Which of the following statements is FALSE? A) Checkable deposits are usually the lowest cost source of bank funds. B) Checkable deposits are the primary source of bank funds. C) Checkable deposits are payable on demand. D) Checkable deposits include NOW accounts. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 7) In recent years the interest paid on checkable and nontransaction deposits has accounted for around ________ of total bank operating expenses, while the costs involved in servicing accounts have been approximately ________ of operating expenses. A) 45 percent; 55 percent B) 55 percent; 4 percent C) 5 percent; 85 percent D) 50 percent; 30 percent Answer: C Ques Status: Revised AACSB: Application of Knowledge 8) Which of the following statements are TRUE? A) Checkable deposits are payable on demand. B) Checkable deposits do not include NOW accounts. C) Checkable deposits are the primary source of bank funds. D) Checkable deposits are assets for the bank. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 9) Because checking accounts are ________ liquid for the depositor than savings accounts, they earn ________ interest rates. A) less; higher B) less; lower C) more; higher D) more; lower Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 2 Copyright © 2019 Pearson Education, Inc.

10) Which of the following are transaction deposits? A) savings accounts B) small-denomination time deposits C) checkable deposits D) certificates of deposit Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 11) All of the following are nontransaction deposits EXCEPT A) savings accounts. B) small-denomination time deposits. C) checkable deposits. D) certificates of deposit. Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 12) Large-denomination CDs are ________, so that like a bond they can be resold in a ________ market before they mature. A) nonnegotiable; secondary B) nonnegotiable; primary C) negotiable; secondary D) negotiable; primary Answer: C Ques Status: Previous Edition AACSB: Application of Knowledge 13) Because ________ are less liquid for the depositor than ________, they earn higher interest rates. A) money market deposit accounts; time deposits B) checkable deposits; savings accounts C) savings accounts; checkable deposits D) savings accounts; time deposits Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 14) Because ________ are less liquid for the depositor than ________, they earn higher interest rates. A) savings accounts; time deposits B) money market deposit accounts; time deposits C) money market deposit accounts; savings accounts D) time deposits; savings accounts Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 3 Copyright © 2019 Pearson Education, Inc.

15) Banks acquire the funds that they use to purchase income-earning assets from such sources as A) cash items in the process of collection. B) savings accounts. C) reserves. D) deposits at other banks. Answer: B Ques Status: Previous Edition AACSB: Application of Knowledge 16) Bank loans from the Federal Reserve are called ________ and represent a ________ of funds. A) discount loans; use B) discount loans; source C) fed funds; use D) fed funds; source Answer: B Ques Status: Previous Edition AACSB: Application of Knowledge 17) Which of the following is NOT a source of borrowings for a bank? A) federal funds B) Eurodollars C) transaction deposits D) discount loans Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 18) Bank capital is equal to ________ minus ________. A) total assets; total liabilities B) total liabilities; total assets C) total assets; total reserves D) total liabilities; total borrowings Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 19) Bank ________ is/are listed on the liability side of the bank's balance sheet. A) reserves B) capital C) securities D) cash items Answer: B Ques Status: Previous Edition AACSB: Application of Knowledge 4 Copyright © 2019 Pearson Education, Inc.

20) Bank reserves include A) deposits at the Fed and short-term treasury securities. B) vault cash and short-term Treasury securities. C) vault cash and deposits at the Fed. D) deposits at other banks and deposits at the Fed. Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 21) The amount of checkable deposits that banks are required by regulation to hold are the A) excess reserves. B) required reserves. C) vault cash. D) total reserves. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 22) Which of the following are reported as assets on a bank's balance sheet? A) borrowings B) reserves C) savings deposits D) bank capital Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 23) Which of the following are NOT reported as assets on a bank's balance sheet? A) cash items in the process of collection B) deposits with other banks C) U.S. Treasury securities D) checkable deposits Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 24) Through correspondent banking, large banks provide services to small banks, including A) loan guarantees. B) foreign exchange transactions. C) issuing stock. D) debt reduction. Answer: B Ques Status: Previous Edition AACSB: Application of Knowledge

25) The largest percentage of banks' holdings of securities consist of A) Treasury and government agency securities. B) tax-exempt municipal securities. C) state and local government securities. D) corporate securities. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 26) Which of the following bank assets is the most liquid? A) consumer loans B) reserves C) state and local government securities D) U.S. government securities Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 27) Secondary reserves include A) deposits at Federal Reserve Banks. B) deposits at other large banks. C) short-term U.S. government securities. D) state and local government securities. Answer: C Ques Status: Previous Edition AACSB: Application of Knowledge 28) Because of their ________ liquidity, ________ U.S. government securities are called secondary reserves. A) low; short-term B) low; long-term C) high; short-term D) high; long-term Answer: C Ques Status: Previous Edition AACSB: Application of Knowledge 29) Secondary reserves are so called because A) they can be converted into cash with low transactions costs. B) they are not easily converted into cash, and are, therefore, of secondary importance to banking firms. C) 50% of these assets count toward meeting required reserves. D) they rank second to bank vault cash in importance of bank holdings. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 6 Copyright © 2019 Pearson Education, Inc.

30) Banks' asset portfolios include state and local government securities because A) they help to attract business from these government entities. B) banks consider them helpful in attracting accounts of Federal employees. C) the Federal Reserve requires member banks to buy securities from state and local governments located within their respective Federal Reserve districts. D) there is no default-risk with state and local government securities. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 31) Bank's make their profits primarily by issuing A) equity. B) negotiable CDs. C) loans. D) NOW accounts. Answer: C Ques Status: Previous Edition AACSB: Application of Knowledge 32) The most important category of assets on a bank's balance sheet is A) other assets. B) securities. C) loans. D) cash items in the process of collection. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 33) Which of the following are bank assets? A) the building owned by the bank B) a discount loan C) a negotiable CD D) a customer's checking account Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 34) Banks may borrow from or lend to another bank in the Federal Funds market. A loan of excess reserves from one bank to another bank is recorded as a(n) ________ for the borrowing bank and a(n) ________ for the lending bank. A) asset; asset B) asset; liability C) liability; liability D) liability; asset Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 7 Copyright © 2019 Pearson Education, Inc.

9.2 Basic Banking 1) Banks earn profits by selling ________ with attractive combinations of liquidity, risk, and return, and using the proceeds to buy ________ with a different set of characteristics. A) loans; deposits B) securities; deposits C) liabilities; assets D) assets; liabilities Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 2) In general, banks make profits by selling ________ liabilities and buying ________ assets. A) long-term; shorter-term B) short-term; longer-term C) illiquid; liquid D) risky; risk-free Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 3) Asset transformation can be described as A) borrowing long and lending short. B) borrowing short and lending long. C) borrowing and lending only for the short term. D) borrowing and lending for the long term. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 4) When a new depositor opens a checking account at the First National Bank, the bank's assets ________ and its liabilities ________. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking

5) When Jane Brown writes a $100 check to her nephew and he cashes the check, Ms. Brown's bank ________ assets of $100 and ________ liabilities of $100. A) gains; gains B) gains; loses C) loses; gains D) loses; loses Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 6) When you deposit a $50 bill in the Security Pacific National Bank A) its liabilities decrease by $50. B) its assets increase by $50. C) its reserves decrease by $50. D) its cash items in the process of collection increase by $50. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 7) When you deposit $50 in currency at Old National Bank A) its assets increase by less than $50 because of reserve requirements. B) its reserves increase by less than $50 because of reserve requirements. C) its liabilities increase by $50. D) its liabilities decrease by $50. Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 8) Holding all else constant, when a bank receives the funds for a deposited check A) cash items in the process of collection fall by the amount of the check. B) bank assets increase by the amount of the check. C) bank liabilities decrease by the amount of the check. D) bank reserves increase by the amount of required reserves. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 9) When a $10 check written on the First National Bank of Chicago is deposited in an account at Citibank, then A) the liabilities of the First National Bank increase by $10. B) the reserves of the First National Bank increase by $ 10. C) the liabilities of Citibank increase by $10. D) the assets of Citibank fall by $10. Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 9 Copyright © 2019 Pearson Education, Inc.

10) When a $10 check written on the First National Bank of Chicago is deposited in an account at Citibank, then A) the liabilities of the First National Bank decrease by $10. B) the reserves of the First National Bank increase by $10. C) the liabilities of Citibank decrease by $10. D) the assets of Citibank decrease by $10. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 11) When you deposit $50 in your account at First National Bank and a $100 check you have written on this account is cashed at Chemical Bank, then A) the assets of First National rise by $50. B) the assets of Chemical Bank rise by $50. C) the reserves at First National fall by $50. D) the liabilities at Chemical Bank rise by $50. Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 12) When $1 million is deposited at a bank, the required reserve ratio is 20 percent, and the bank chooses not to hold any excess reserves but makes loans instead, then, in the bank's final balance sheet A) the assets at the bank increase by $800,000. B) the liabilities of the bank increase by $1,000,000. C) the liabilities of the bank increase by $800,000. D) reserves increase by $160,000. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 13) When $1 million is deposited at a bank, the required reserve ratio is 20 percent, and the bank chooses not to make any loans but to hold excess reserves instead, then, in the bank's final balance sheet A) the assets at the bank increase by $1 million. B) the liabilities of the bank decrease by $1 million. C) reserves increase by $200,000. D) liabilities increase by $200,000. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking

14) With a 10% reserve requirement ratio, a $100 deposit into New Bank means that the maximum amount New Bank could lend is A) $90. B) $100. C) $10. D) $110. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 15) A deposit outflow results in equal reductions in A) loans and reserves. B) assets and liabilities. C) reserves and capital. D) assets and capital. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 16) A $100 deposit into my checking account at My Bank increases my checkable deposits by $100, and the bank's ________ by $100. A) reserves B) loans C) capital D) securities Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 17) Using T-accounts show what happens to reserves at Security National Bank if one individual deposits $1,000 in cash into her checking account and another individual withdraws $750 in cash from her checking account. Answer: Security National Bank Assets Liabilities Reserves +$250 Checkable deposits +$250 Ques Status: Previous Edition AACSB: Analytical Thinking

9.3 General Principles of Bank Management 1) Which of the following are primary concerns of the bank manager? A) maintaining sufficient reserves to minimize the cost to the bank of deposit outflows B) extending loans to borrowers who will pay low interest rates, but who are poor credit risks C) acquiring funds at a relatively high cost, so that profitable lending opportunities can be realized D) maintaining high levels of capital and thus maximizing the returns to the owners Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 2) If a bank has $100,000 of checkable deposits, a required reserve ratio of 20 percent, and it holds $40,000 in reserves, then the maximum deposit outflow it can sustain without altering its balance sheet is A) $30,000. B) $25,000. C) $20,000. D) $10,000. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 3) If a bank has $200,000 of checkable deposits, a required reserve ratio of 20 percent, and it holds $80,000 in reserves, then the maximum deposit outflow it can sustain without altering its balance sheet is A) $50,000. B) $40,000. C) $30,000. D) $25,000. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 4) If a bank has $10 million of checkable deposits, a required reserve ratio of 10 percent, and it holds $2 million in reserves, then it will not have enough reserves to support a deposit outflow of A) $1.2 million. B) $1.1 million. C) $1 million. D) $900,000. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking

5) If a bank has excess reserves greater than the amount of a deposit outflow, the outflow will result in equal reductions in A) deposits and reserves. B) deposits and loans. C) capital and reserves. D) capital and loans. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 6) A $5 million deposit outflow from a bank has the immediate effect of A) reducing deposits and reserves by $5 million. B) reducing deposits and loans by $5 million. C) reducing deposits and securities by $5 million. D) reducing deposits and capital by $5 million. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 7) Bankers' concerns regarding the optimal mix of excess reserves, secondary reserves, borrowings from the Fed, and borrowings from other banks to deal with deposit outflows is an example of A) liability management. B) liquidity management. C) managing interest rate risk. D) managing credit risk. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 8) If, after a deposit outflow, a bank needs an additional $3 million to meet its reserve requirements, the bank can A) reduce deposits by $3 million. B) increase loans by $3 million. C) sell $3 million of securities that the bank currently owns. D) repay its discount loans from the Fed. Answer: C Ques Status: Revised AACSB: Reflective Thinking

9) A bank with insufficient reserves can increase its reserves by A) lending federal funds. B) calling in loans. C) buying short-term Treasury securities. D) buying municipal bonds. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 10) Of the following, which would be the last choice for a bank facing a reserve deficiency? A) Call in loans. B) Borrow from the Fed. C) Sell securities. D) Borrow from other banks. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 11) In general, banks would prefer to acquire funds quickly by ________ rather than ________. A) reducing loans; selling securities B) reducing loans; borrowing from the Fed C) borrowing from the Fed; reducing loans D) "calling in" loans; selling securities Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 12) ________ may antagonize customers and thus can be a very costly way of acquiring funds to meet an unexpected deposit outflow. A) Selling securities B) Selling loans C) Calling in loans D) Selling negotiable CDs Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 13) Banks hold excess and secondary reserves to A) reduce the interest-rate risk problem. B) provide for unexpected deposit outflows. C) satisfy margin requirements. D) achieve higher earnings than they can with loans. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking

14) If a bank needs to acquire funds quickly to meet an unexpected deposit outflow, the bank could A) borrow from another bank in the federal funds market. B) buy U.S. Treasury bills. C) increase loans. D) buy corporate bonds. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 15) Which of the following statements most accurately describes the task of bank asset management? A) Banks seek the highest returns possible subject to minimizing risk and making adequate provisions for liquidity. B) Banks seek to have the highest liquidity possible subject to earning a positive rate of return on their operations. C) Banks seek to prevent bank failure at all cost; since a failed bank earns no profit, liquidity needs supersede the desire for profits. D) Banks seek to acquire funds in the least costly way. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 16) The goals of bank asset management include A) maximizing risk. B) minimizing liquidity. C) lending at high interest rates regardless of risk. D) purchasing securities with high returns and low risk. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 17) Banks that suffered significant losses in the 1980s made the mistake of A) holding too many liquid assets. B) minimizing default risk. C) failing to diversify their loan portfolio. D) holding only safe securities. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking

18) A bank will want to hold more excess reserves (everything else equal) when A) it expects to have deposit inflows in the near future. B) brokerage commissions on selling bonds increase. C) the cost of selling loans falls. D) the discount rate decreases. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 19) As the costs associated with deposit outflows ________, the banks willingness to hold excess reserves will ________. A) decrease; increase B) increase; decrease C) increase; increase D) decrease; not be affected Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 20) Which of the following would a bank NOT hold as insurance against the highest cost of deposit outflow-bank failure? A) excess reserves B) secondary reserves C) bank capital D) mortgages Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 21) Which of the following has NOT resulted from more active liability management on the part of banks? A) increased bank holdings of cash items B) aggressive targeting of goals for asset growth by banks C) increased use of negotiable CDs to raise funds D) an increased proportion of bank assets held in loans Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 22) Banks that actively manage liabilities will most likely meet a reserve shortfall by A) calling in loans. B) borrowing federal funds. C) selling municipal bonds. D) seeking new deposits. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 16 Copyright © 2019 Pearson Education, Inc.

23) Modern liability management has resulted in A) increased sales of negotiable CDs to raise funds. B) increase importance of deposits as a source of funds. C) reduced borrowing by banks in the overnight loan market. D) failure by banks to coordinate management of assets and liabilities. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 24) A bank failure occurs whenever A) a bank cannot satisfy its obligations to pay its depositors and other creditors. B) a bank suffers a large deposit outflow. C) a bank has to call in a large volume of loans. D) a bank refuses to make new loans. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 25) A bank is insolvent when A) its liabilities exceed its assets. B) its assets exceed its liabilities. C) its capital exceeds its liabilities. D) its assets increase in value. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 26) Holding large amounts of bank capital helps prevent bank failures because A) it means that the bank has a higher income. B) it makes loans easier to sell. C) it can be used to absorb the losses resulting from bad loans. D) it makes it easier to call in loans. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 27) Net profit after taxes per dollar of assets is a basic measure of bank profitability called A) return on assets. B) return on capital. C) return on equity. D) return on investment. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge

28) Net profit after taxes per dollar of equity capital is a basic measure of bank profitability called A) return on assets. B) return on capital. C) return on equity. D) return on investment. Answer: C Ques Status: Previous Edition AACSB: Application of Knowledge 29) The amount of assets per dollar of equity capital is called the A) asset ratio. B) equity ratio. C) equity multiplier. D) asset multiplier. Answer: C Ques Status: Previous Edition AACSB: Application of Knowledge 30) For a given return on assets, the lower is bank capital A) the lower is the return for the owners of the bank. B) the higher is the return for the owners of the bank. C) the lower is the credit risk for the owners of the bank. D) the lower the possibility of bank failure. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 31) Bank capital has both benefits and costs for the bank owners. Higher bank capital ________ the likelihood of bankruptcy, but higher bank capital ________ the return on equity for a given return on assets. A) reduces; reduces B) increases; increases C) reduces; increases D) increases; reduces Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 32) In the absence of regulation, banks would probably hold A) too much capital, reducing the efficiency of the payments system. B) too much capital, reducing the profitability of banks. C) too little capital. D) too much capital, making it more difficult to obtain loans. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 18 Copyright © 2019 Pearson Education, Inc.

33) Banks hold capital because A) they are required to by regulatory authorities. B) higher capital increases the returns to the owners. C) it increases the likelihood of bankruptcy. D) higher capital increases the return on equity. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 34) Conditions that likely contributed to a credit crunch during the global financial crisis include A) capital shortfalls caused in part by falling real estate prices. B) regulated hikes in bank capital requirements. C) falling interest rates that raised interest rate risk, causing banks to choose to hold more capital. D) increases in reserve requirements. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 35) Which of the following would NOT be a way to increase the return on equity? A) Buy back bank stock. B) Pay higher dividends. C) Acquire new funds by selling negotiable CDs and increase assets with them. D) Sell more bank stock. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 36) If a bank needs to raise the amount of capital relative to assets, a bank manager might choose to A) buy back bank stock. B) pay higher dividends. C) reduce the bank's assets by making fewer loans. D) sell securities the bank owns and put the funds into the reserve account. Answer: C Ques Status: Revised AACSB: Reflective Thinking

37) Your bank has the following balance sheet: Assets Reserves $50 million Securities 50 million Loans 150 million

Liabilities Checkable deposits $200 million Bank capital

50 million

If the required reserve ratio is 10%, what actions should the bank manager take if there is an unexpected deposit outflow of $50 million? Answer: After the deposit outflow, the bank will have a reserve shortfall of $15 million. The bank manager could try to borrow in the Federal Funds market, take out a discount loan from the Federal Reserve, sell $15 million of the securities the bank owns, sell off $15 million of the loans the bank owns, or lastly call-in $15 million of loans. All of the actions will be costly to the bank. The bank manager should try to acquire the funds with the least costly method. Ques Status: Previous Edition AACSB: Reflective Thinking 9.4 Managing Credit Risk 1) Banks face the problem of ________ in loan markets because bad credit risks are the ones most likely to seek bank loans. A) adverse selection B) moral hazard C) moral suasion D) intentional fraud Answer: A Ques Status: Previous Edition AACSB: Ethical Understanding and Reasoning Abilities 2) If borrowers with the most risky investment projects seek bank loans in higher proportion to those borrowers with the safest investment projects, banks are said to face the problem of A) adverse credit risk. B) adverse selection. C) moral hazard. D) lemon lenders. Answer: B Ques Status: Previous Edition AACSB: Ethical Understanding and Reasoning Abilities

3) Because borrowers, once they have a loan, are more likely to invest in high-risk investment projects, banks face the A) adverse selection problem. B) lemon problem. C) adverse credit risk problem. D) moral hazard problem. Answer: D Ques Status: Previous Edition AACSB: Ethical Understanding and Reasoning Abilities 4) In order to reduce the ________ problem in loan markets, bankers collect information from prospective borrowers to screen out the bad credit risks from the good ones. A) moral hazard B) adverse selection C) moral suasion D) adverse lending Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 5) In one sense ________ appears surprising since it means that the bank is not ________ its portfolio of loans and thus is exposing itself to more risk. A) specialization in lending; diversifying B) specialization in lending; rationing C) credit rationing; diversifying D) screening; rationing Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 6) From the standpoint of ________, specialization in lending is surprising but makes perfect sense when one considers the ________ problem. A) moral hazard; diversification B) diversification; moral hazard C) adverse selection; diversification D) diversification; adverse selection Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking

7) Provisions in loan contracts that prohibit borrowers from engaging in specified risky activities are called A) proscription bonds. B) restrictive covenants. C) due-on-sale clauses. D) liens. Answer: B Ques Status: Previous Edition AACSB: Application of Knowledge 8) To reduce moral hazard problems, banks include restrictive covenants in loan contracts. In order for these restrictive covenants to be effective, banks must also A) monitor and enforce them. B) be willing to rewrite the contract if the borrower cannot comply with the restrictions. C) trust the borrower to do the right thing. D) be prepared to extend the deadline when the borrower needs more time to comply. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 9) Long-term customer relationships ________ the cost of information collection and make it easier to ________ credit risks. A) reduce; screen B) increase; screen C) reduce; increase D) increase; increase Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 10) Unanticipated moral hazard contingencies can be reduced by A) screening. B) long-term customer relationships. C) specialization in lending. D) credit rationing. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking

11) A bank's commitment to provide a firm with loans up to pre-specified limit at an interest rate that is tied to a market interest rate is called A) an adjustable gap loan. B) an adjustable portfolio loan. C) loan commitment. D) pre-credit loan line. Answer: C Ques Status: Previous Edition AACSB: Application of Knowledge 12) Property promised to the lender as compensation if the borrower defaults is called A) collateral. B) deductibles. C) restrictive covenants. D) contingencies. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 13) Collateral requirements lessen the consequences of ________ because the collateral reduces the lender's losses in the case of a loan default and it reduces ________ because the borrower has more to lose from a default. A) adverse selection; moral hazard B) moral hazard; adverse selection C) adverse selection; diversification D) diversification; moral hazard Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 14) A bank that wants to monitor the check payment practices of its commercial borrowers, so that moral hazard can be reduced, will require borrowers to A) place a bank officer on their board of directors. B) place a corporate officer on the bank's board of directors. C) keep compensating balances in a checking account at the bank. D) purchase the bank's CDs. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking

15) Of the following methods that banks might use to reduce moral hazard problems, the one not legally permitted in the United States is the A) requirement that firms keep compensating balances at the banks from which they obtain their loans. B) requirement that firms place on their board of directors an officer from the bank. C) inclusion of restrictive covenants in loan contracts. D) requirement that individuals provide detailed credit histories to bank loan officers. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 16) When a lender refuses to make a loan, although borrowers are willing to pay the stated interest rate or even a higher rate, the bank is said to engage in A) coercive bargaining. B) strategic holding out. C) credit rationing. D) collusive behavior. Answer: C Ques Status: Previous Edition AACSB: Application of Knowledge 17) When banks offer borrowers smaller loans than they have requested, banks are said to A) shave credit. B) rediscount the loan. C) raze credit. D) ration credit. Answer: D Ques Status: Previous Edition AACSB: Application of Knowledge 18) Credit risk management tools include A) deductibles. B) collateral. C) interest rate swaps. D) duration analysis. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 19) How can specializing in lending help to reduce the adverse selection problem in lending? Answer: Reducing the adverse selection problem requires the banks to acquire information to screen bad credit risks from good credit risks. It is easier for banks to obtain information about local businesses. Also if the bank lends to firms in a few specific industries they will become more knowledgeable about those industries and a better judge of creditworthiness in those industries. Ques Status: Previous Edition AACSB: Reflective Thinking 24 Copyright © 2019 Pearson Education, Inc.

9.5 Managing Interest-Rate Risk 1) Risk that is related to the uncertainty about interest rate movements is called A) default risk. B) interest-rate risk. C) the problem of moral hazard. D) security risk. Answer: B Ques Status: Previous Edition AACSB: Application of Knowledge 2) All else the same, if a bank's liabilities are more sensitive to interest rate fluctuations than are its assets, then ________ in interest rates will ________ bank profits. A) an increase; increase B) an increase; reduce C) a decline; reduce D) a decline; not affect Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 3) If a bank has ________ rate-sensitive assets than liabilities, then ________ in interest rates will increase bank profits. A) more; a decline B) more; an increase C) fewer; an increase D) fewer; a surge Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 4) If a bank has ________ rate-sensitive assets than liabilities, a ________ in interest rates will reduce bank profits, while a ________ in interest rates will raise bank profits. A) more; rise; decline B) more; decline; rise C) fewer; decline; decline D) fewer; rise; rise Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking

5) If a bank's liabilities are more sensitive to interest rate movements than are its assets, then A) an increase in interest rates will reduce bank profits. B) a decrease in interest rates will reduce bank profits. C) interest rates changes will not impact bank profits. D) an increase in interest rates will increase bank profits. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 6) If a bank has $50 million in rate-sensitive assets and $20 million in rate-sensitive liabilities then A) an increase in interest rates will reduce bank profits. B) a decrease in interest rates will reduce bank profits. C) interest rate changes will not impact bank profits. D) a decrease in interest rates will increase bank profits. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 7) The difference of rate-sensitive liabilities and rate-sensitive assets is known as the A) duration. B) interest-sensitivity index. C) rate-risk index. D) gap. Answer: D Ques Status: Previous Edition AACSB: Application of Knowledge 8) If the First National Bank has a gap equal to a negative $30 million, then a 5 percentage point increase in interest rates will cause profits to A) increase by $15 million. B) increase by $1.5 million. C) decline by $15 million. D) decline by $1.5 million. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 9) Measuring the sensitivity of bank profits to changes in interest rates by multiplying the gap times the change in the interest rate is called A) basic duration analysis. B) basic gap analysis. C) interest-exposure analysis. D) gap-exposure analysis. Answer: B Ques Status: Previous Edition AACSB: Application of Knowledge 26 Copyright © 2019 Pearson Education, Inc.

10) Measuring the sensitivity of bank profits to changes in interest rates by multiplying the gap for several maturity subintervals times the change in the interest rate is called A) basic gap analysis. B) the maturity bucket approach to gap analysis. C) the segmented maturity approach to gap analysis. D) the segmented maturity approach to interest-exposure analysis. Answer: B Ques Status: Previous Edition AACSB: Application of Knowledge First National Bank Assets Rate-sensitive $20 million $80 million Fixed-rate

Liabilities $50 million $50 million

11) If interest rates rise by 5 percentage points, say, from 10 to 15%, bank profits (measured using gap analysis) will A) decline by $0.5 million. B) decline by $1.5 million. C) decline by $2.5 million. D) increase by $1.5 million. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 12) Assuming that the average duration of its assets is five years, while the average duration of its liabilities is three years, then a 5 percentage point increase in interest rates will cause the net worth of First National to decline by ________ of the total original asset value. A) 5 percent B) 10 percent C) 15 percent D) 25 percent Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking

First National Bank Assets Rate-sensitive $40 million $60 million Fixed-rate

Liabilities $50 million $50 million

13) If interest rates rise by 5 percentage points, say from 10 to 15%, bank profits (measured using gap analysis) will A) decline by $0.5 million. B) decline by $1.5 million. C) decline by $2.5 million. D) increase by $2.0 million. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 14) Assuming that the average duration of its assets is four years, while the average duration of its liabilities is three years, then a 5 percentage point increase in interest rates will cause the net worth of First National to ________ by ________ of the total original asset value. A) decline; 5 percent B) decline; 10 percent C) decline; 15 percent D) increase; 20 percent Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 15) Duration analysis involves comparing the average duration of the bank's ________ to the average duration of its ________. A) securities portfolio; non-deposit liabilities B) assets; liabilities C) loan portfolio; deposit liabilities D) assets; deposit liabilities Answer: B Ques Status: Previous Edition AACSB: Application of Knowledge 16) Because of an expected rise in interest rates in the future, a banker will likely A) make long-term rather than short-term loans. B) buy short-term rather than long-term bonds. C) buy long-term rather than short-term bonds. D) make either short or long-term loans; expectations of future interest rates are irrelevant. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking

17) If a banker expects interest rates to fall in the future, her best strategy for the present is A) to increase the duration of the bank's liabilities. B) to buy short-term bonds. C) to sell long-term certificates of deposit. D) to increase the duration of the bank's assets. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 18) Bruce the Bank Manager can reduce interest rate risk by ________ the duration of the bank's assets to increase their rate sensitivity or, alternatively, ________ the duration of the bank's liabilities. A) shortening; lengthening B) shortening; shortening C) lengthening; lengthening D) lengthening; shortening Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 19) Your bank has the following balance sheet Assets Rate-sensitive $100 million Fixed-rate 100 million

Liabilities Rate-sensitive Fixed-rate

$75 million 125 million

What would happen to bank profits if the interest rates in the economy go down? Is there anything that you could do to keep your bank from being so vulnerable to interest rate movements? Answer: The bank's profits would go down because it has more interest-rate sensitive assets than liabilities. In order to reduce interest-rate sensitivity, the bank manager could use financial derivatives such as interest-rate swaps, options, or futures. The bank manager could also try to adjust the balance sheet so that the bank's profits are not vulnerable to the movement of the interest rate. Ques Status: Previous Edition AACSB: Reflective Thinking

9.6 Off-Balance-Sheet Activities 1) Examples of off-balance-sheet activities include A) trading activities. B) extending loans to depositors. C) borrowing from other banks. D) selling negotiable CDs. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 2) Banks earn profits from off-balance sheet loan sales A) by foreclosing on delinquent accounts. B) by selling the loans at discounted prices. C) by selling existing loans for more than the original loan amount. D) by calling-in loans before the maturity date. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 3) All of the following are examples of off-balance sheet activities that generate fee income for banks EXCEPT A) foreign exchange trades. B) guaranteeing debt securities. C) back-up lines of credit. D) selling negotiable CDs. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 4) Which of the following is NOT an example of a backup line of credit? A) loan commitments B) overdraft privileges C) standby letters of credit D) mortgages Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 5) Off-balance sheet activities involving guarantees of securities and back-up credit lines A) have no impact on the risk a bank faces. B) greatly reduce the risk a bank faces. C) increase the risk a bank faces. D) slightly reduce the risk a bank faces. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 30 Copyright © 2019 Pearson Education, Inc.

6) When banks involved in trading activities attempt to outguess markets, they are A) forecasting. B) diversifying. C) speculating. D) engaging in riskless arbitrage. Answer: C Ques Status: Previous Edition AACSB: Application of Knowledge 7) Traders working for banks are subject to the A) principal-agent problem. B) free-rider problem. C) double-jeopardy problem. D) exchange-risk problem. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 8) A reason why rogue traders have bankrupt their banks is due to A) the separation of trading activities from the bookkeepers. B) stringent supervision of trading activities by bank management. C) accounting errors. D) a failure to maintain proper internal controls. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 9) One way for banks to reduce the principal-agent problems associated with trading activities is to A) set limits on the total amount of a traders' transactions. B) make sure that the person conducting the trades is also the person responsible for recording the transactions. C) encourage traders to take on more risk if the potential rewards are higher. D) reduce the regulations on the traders so that they have more flexibility in conducting trades. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 10) The principal-agent problem that exists for bank trading activities can be reduced through A) creation of internal controls that combine trading activities with bookkeeping. B) creation of internal controls that separate trading activities from bookkeeping. C) elimination of regulation of banking. D) elimination of internal controls. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 31 Copyright © 2019 Pearson Education, Inc.

11) Banks develop statistical models to calculate their maximum loss over a given time period. This approach is known as the A) stress-testing approach. B) value-at-risk approach. C) trading-loss approach. D) doomsday approach. Answer: B Ques Status: Previous Edition AACSB: Application of Knowledge 12) When banks calculate the losses the institution would incur if an unusual combination of bad events happened, the bank is using the ________ approach. A) stress-test B) value-at-risk C) trading-loss D) maximum value Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 9.7 Web Appendix 1: Duration Gap Analysis 1) Assume a bank has $200 million of assets with a duration of 2.5, and $190 million of liabilities with a duration of 1.05. If interest rates increase from 5 percent to 6 percent, the net worth of the bank falls by A) $1 million. B) $2.4 million. C) $3.6 million. D) $4.8 million. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 2) Assume a bank has $200 million of assets with a duration of 2.5, and $190 million of liabilities with a duration of 1.05. The duration gap for this bank is A) 0.5 year. B) 1 year. C) 1.5 years. D) 2 years. Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking

3) If interest rates increase from 9 percent to 10 percent, a bank with a duration gap of 2 years would experience a decrease in its net worth of A) 0.9 percent of its assets. B) 0.9 percent of its liabilities. C) 1.8 percent of its liabilities. D) 1.8 percent of its assets. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 4) One of the problems in conducting a duration gap analysis is that the duration gap is calculated assuming that interest rates for all maturities are the same. That means that the yield curve is A) flat. B) slightly upward sloping. C) steeply upward sloping. D) downward sloping. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 9.8 Web Appendix 2: Measuring Bank Performance 1) Most of a bank's operating income results from A) interest on assets. B) service charges on deposit accounts. C) off-balance-sheet activities. D) fees from standby lines of credit. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 2) All of the following are operating expenses for a bank EXCEPT A) service charges on deposit accounts. B) salaries and employee benefits. C) rent on buildings. D) servicing costs of equipment such as computers. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking

3) When a bank suspects that a $1 million loan might prove to be bad debt that will have to be written off in the future the bank A) can set aside $1 million of its earnings in its loan loss reserves account. B) reduces its reported earnings by $1, even though it has not yet actually lost the $1 million. C) reduces its assets immediately by $1 million, even though it has not yet lost the $1 million. D) reduces its reserves by $1 million, so that they can use those funds later. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 4) For banks A) return on assets exceeds return on equity. B) return on assets equals return on equity. C) return on equity exceeds return on assets. D) return on equity is another name for net interest margin. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 5) Interest income minus interest expenses divided by assets is a measure of bank performance known as the A) operating income. B) net interest margin. C) return on assets. D) return on equity. Answer: B Ques Status: Previous Edition AACSB: Application of Knowledge 6) Based on the Net Interest Margin the poor bank performance in the late 1980s A) was not the result of interest-rate movements. B) was not the result of risky loans made in the early 1980s. C) resulted from a narrowing of the gap between interest earned on assets and inters paid on liabilities. D) resulted from a huge decrease in provisions for loan losses. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking

Economics of Money, Banking, and Financial Markets, 12e (Mishkin) Chapter 10 Economic Analysis of Financial Regulation 10.1 Asymmetric Information as a Rationale for Financial Regulation 1) Depositors lack of information about the quality of bank assets can lead to A) bank panics. B) bank booms. C) sequencing. D) asset transformation. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 2) The fact that banks operate on a "sequential service constraint" means that A) all depositors share equally in the bank's funds during a crisis. B) depositors arriving last are just as likely to receive their funds as those arriving first. C) depositors arriving first have the best chance of withdrawing their funds. D) banks randomly select the depositors who will receive all of their funds. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 3) Depositors have a strong incentive to show up first to withdraw their funds during a bank crisis because banks operate on a A) last-in, first-out constraint. B) sequential service constraint. C) double-coincidence of wants constraint. D) everyone-shares-equally constraint. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 4) Because of asymmetric information, the failure of one bank can lead to runs on other banks. This is the A) too-big-to-fail effect. B) moral hazard problem. C) adverse selection problem. D) contagion effect. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking

5) The contagion effect refers to the fact that A) deposit insurance has eliminated the problem of bank failures. B) bank runs involve only sound banks. C) bank runs involve only insolvent banks. D) the failure of one bank can hasten the failure of other banks. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 6) During the boom years of the 1920s, bank failures were quite A) uncommon, averaging less than 30 per year. B) uncommon, averaging less than 100 per year. C) common, averaging about 600 per year. D) common, averaging about 1,000 per year. Answer: C Ques Status: Previous Edition AACSB: Application of Knowledge 7) To prevent bank runs and the consequent bank failures, the United States established the ________ in 1934 to provide deposit insurance. A) FDIC B) SEC C) Federal Reserve D) ATM Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 8) The primary difference between the "payoff" and the "purchase and assumption" methods of handling failed banks is A) that the FDIC guarantees all deposits when it uses the "payoff" method. B) that the FDIC guarantees all deposits when it uses the "purchase and assumption" method. C) that the FDIC is more likely to use the "payoff" method when the bank is large and it fears that depositor losses may spur business bankruptcies and other bank failures. D) that the FDIC is more likely to use the purchase and assumption method for small institutions because it will be easier to find a purchaser for them compared to large institutions. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking

9) Deposit insurance has not worked well in countries with A) a weak institutional environment. B) strong supervision and regulation. C) a tradition of the rule of law. D) few opportunities for corruption. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 10) When one party to a transaction has incentives to engage in activities detrimental to the other party, there exists a problem of A) moral hazard. B) split incentives. C) ex ante shirking. D) pre-contractual opportunism. Answer: A Ques Status: Previous Edition AACSB: Ethical Understanding and Reasoning Abilities 11) Moral hazard is an important concern of insurance arrangements because the existence of insurance A) provides increased incentives for risk taking. B) is a hindrance to efficient risk taking. C) causes the private cost of the insured activity to increase. D) creates an adverse selection problem but no moral hazard problem. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 12) When bad drivers line up to purchase collision insurance, automobile insurers are subject to the A) moral hazard problem. B) adverse selection problem. C) assigned risk problem. D) ill queue problem. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking

13) Deposit insurance is only one type of government safety net. All of the following are types of government support for troubled financial institutions EXCEPT A) forgiving tax debt. B) lending from the central bank. C) lending directly from the government's treasury department. D) nationalizing and guaranteeing that all creditors will be repaid their loans in full. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 14) Although the FDIC was created to prevent bank failures, its existence encourages banks to A) take too much risk. B) hold too much capital. C) open too many branches. D) buy too much stock. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 15) A system of deposit insurance A) attracts risk-taking entrepreneurs into the banking industry. B) encourages bank managers to decrease risk. C) increases the incentives of depositors to monitor the riskiness of their bank's asset portfolio. D) increases the likelihood of bank runs. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 16) The government safety net creates ________ problem because risk-loving entrepreneurs might find banking an attractive industry. A) an adverse selection B) a moral hazard C) a lemons D) a revenue Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 17) Since depositors, like any lender, only receive fixed payments while the bank keeps any surplus profits, they face the ________ problem that banks may take on too ________ risk. A) adverse selection; little B) adverse selection; much C) moral hazard; little D) moral hazard; much Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 4 Copyright © 2019 Pearson Education, Inc.

18) Acquiring information on a bank's activities in order to determine a bank's risk is difficult for depositors and is another argument for government A) regulation. B) ownership. C) recall. D) forbearance. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 19) The existence of deposit insurance can increase the likelihood that depositors will need deposit protection, as banks with deposit insurance A) are likely to take on greater risks than they otherwise would. B) are likely to be too conservative, reducing the probability of turning a profit. C) are likely to regard deposits as an unattractive source of funds due to depositors' demands for safety. D) are placed at a competitive disadvantage in acquiring funds. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 20) In May 1991, the FDIC announced that it would sell the government's final 26% stake in Continental Illinois, ending government ownership of the bank that it had rescued in 1984. The FDIC took control of the bank, rather than liquidate it, because it believed that Continental Illinois A) was a good investment opportunity for the government. B) could be the Chicago branch of a new governmentally-owned interstate banking system. C) was too big to fail. D) would become the center of the new midwest region central bank system. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 21) If the FDIC decides that a bank is too big to fail, it will use the ________ method, effectively ensuring that ________ depositors will suffer losses. A) payoff; large B) payoff; no C) purchase and assumption; large D) purchase and assumption; no Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking

22) Federal deposit insurance covers deposits up to $250,000, but as part of a doctrine called "too-big-to-fail" the FDIC sometimes ends up covering all deposits to avoid disrupting the financial system. When the FDIC does this, it uses the A) "payoff" method. B) "purchase and assumption" method. C) "inequity" method. D) "Basel" method. Answer: B Ques Status: Previous Edition AACSB: Application of Knowledge 23) The result of the too-big-to-fail policy is that ________ banks will take on ________ risks, making bank failures more likely. A) small; fewer B) small; greater C) big; fewer D) big; greater Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 24) A problem with the too-big-to-fail policy is that it ________ the incentives for ________ by big banks. A) increases; moral hazard B) decreases; moral hazard C) decreases; adverse selection D) increases; adverse selection Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 25) The too-big-to-fail policy A) reduces moral hazard problems. B) puts large banks at a competitive disadvantage in attracting large deposits. C) treats large depositors of small banks inequitably when compared to depositors of large banks. D) allows small banks to take on more risk than large banks. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking

26) Increased size of financial institutions resulting from financial consolidation increases the ________ problem, because there are now more large institutions whose failure would expose the financial system to systemic risk. A) too-big-to-fail B) asset transformation C) transactions costs D) economies of scale Answer: A Ques Status: New AACSB: Reflective Thinking 27) Financial consolidation of banks with other financial services in recent years poses government safety net problems. The safety net intended for depository institutions may be A) extended to other activities such as securities underwriting. B) too small to do any good. C) filled with large gaps. D) unnecessarily increased when there is a problem in an area that does not impact depository institutions. Answer: A Ques Status: New AACSB: Reflective Thinking 28) The government safety net creates both an adverse selection problem and a moral hazard problem. Explain. Answer: The adverse selection problem occurs because risk-loving individuals might view the banking system as a wonderful opportunity to use other peoples' funds knowing that those funds are protected. The moral hazard problem comes about because depositors will not impose discipline on the banks since their funds are protected and the banks knowing this will be tempted to take on more risk than they would otherwise. Ques Status: Previous Edition AACSB: Reflective Thinking

10.2 Types of Financial Regulation 1) Regulators attempt to reduce the riskiness of banks' asset portfolios by A) limiting the amount of loans in particular categories or to individual borrowers. B) encouraging banks to hold risky assets such as common stocks. C) establishing a minimum interest rate floor that banks can earn on certain assets. D) requiring collateral for all loans. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 2) A well-capitalized financial institution has ________ to lose if it fails and thus is ________ likely to pursue risky activities. A) more; more B) more; less C) less; more D) less; less Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 3) A bank failure is less likely to occur when A) a bank holds less U.S. government securities. B) a bank suffers large deposit outflows. C) a bank holds fewer excess reserves. D) a bank has more bank capital. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 4) The leverage ratio is the ratio of a bank's A) assets divided by its liabilities. B) income divided by its assets. C) capital divided by its total assets. D) capital divided by its total liabilities. Answer: C Ques Status: Previous Edition AACSB: Application of Knowledge 5) To be considered well capitalized, a bank's leverage ratio must exceed A) 10%. B) 8%. C) 5%. D) 3%. Answer: C Ques Status: Previous Edition AACSB: Application of Knowledge 8 Copyright © 2019 Pearson Education, Inc.

6) The FDIC must take steps to close down banks whose equity capital is less than ________ of assets. A) 4% B) 3% C) 2% D) 1% Answer: C Ques Status: Previous Edition AACSB: Application of Knowledge 7) Off-balance-sheet activities A) generate fee income with no increase in risk. B) increase bank risk but do not increase income. C) generate fee income but increase a bank's risk. D) generate fee income and reduce risk. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 8) The Basel Accord, an international agreement, requires banks to hold capital based on A) risk-weighted assets. B) the total value of assets. C) liabilities. D) deposits. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 9) The Basel Accord requires banks to hold as capital an amount that is at least ________ of their risk-weighted assets. A) 10% B) 8% C) 5% D) 3% Answer: B Ques Status: Previous Edition AACSB: Application of Knowledge

10) Under the Basel Accord, assets and off-balance sheet activities were sorted according to ________ categories with each category assigned a different weight to reflect the amount of ________. A) 2; adverse selection B) 2; credit risk C) 4; adverse selection D) 4; credit risk Answer: D Ques Status: Previous Edition AACSB: Application of Knowledge 11) The practice of keeping high-risk assets on a bank's books while removing low-risk assets with the same capital requirement is known as A) competition in laxity. B) depositor supervision. C) regulatory arbitrage. D) a dual banking system. Answer: C Ques Status: Previous Edition AACSB: Application of Knowledge 12) Banks engage in regulatory arbitrage by A) keeping high-risk assets on their books while removing low-risk assets with the same capital requirement. B) keeping low-risk assets on their books while removing high-risk assets with the same capital requirement. C) hiding risky assets from regulators. D) buying risky assets from arbitragers. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 13) Because banks engage in regulatory arbitrage, the Basel Accord on risk-based capital requirements may result in A) reduced risk taking by banks. B) reduced supervision of banks by regulators. C) increased fraudulent behavior by banks. D) increased risk taking by banks. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking

14) One of the criticisms of Basel 2 is that it is procyclical. That means that A) banks may be required to hold more capital during times when capital is short. B) banks may become professional at a cyclical response to economic conditions. C) banks may be required to hold less capital during times when capital is short. D) banks will not be required to hold capital during an expansion. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 15) Overseeing who operates banks and how they are operated is called A) prudential supervision. B) hazard insurance. C) regulatory interference. D) loan loss reserves. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 16) The chartering process is especially designed to deal with the ________ problem, and regular bank examinations help to reduce the ________ problem. A) adverse selection; adverse selection B) adverse selection; moral hazard C) moral hazard; adverse selection D) moral hazard; moral hazard Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 17) The chartering process is similar to ________ potential borrowers and the restriction of risk assets by regulators is similar to ________ in private financial markets. A) screening; restrictive covenants B) screening; branching restrictions C) identifying; branching restrictions D) identifying; credit rationing Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 18) Banks will be examined at least once a year and given a CAMELS rating by examiners. The L stands for A) liabilities. B) liquidity. C) loans. D) leverage. Answer: B Ques Status: Previous Edition AACSB: Application of Knowledge 11 Copyright © 2019 Pearson Education, Inc.

19) The federal agencies that examine banks include A) the Federal Reserve System. B) the Internal Revenue Service. C) the SEC. D) the U.S. Treasury. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 20) Banks are required to file ________ usually quarterly that list information on the bank's assets and liabilities, income and dividends, and so forth. A) call reports B) balance reports C) regulatory sheets D) examiner updates Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 21) Regular bank examinations and restrictions on asset holdings help to indirectly reduce the ________ problem because, given fewer opportunities to take on risk, risk-prone entrepreneurs will be discouraged from entering the banking industry. A) moral hazard B) adverse selection C) ex post shirking D) post-contractual opportunism Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 22) The current supervisory practice toward risk management A) focuses on the quality of a bank's balance sheet. B) determines whether capital requirements have been met. C) evaluates the soundness of a bank's risk-management process. D) focuses on eliminating all risk. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking

23) Regulations designed to provide information to the marketplace so that investors can make informed decisions are called A) disclosure requirements. B) efficient market requirements. C) asset restrictions. D) capital requirements. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 24) The Dodd-Frank legislation of 2010 requires the largest banks in the United States to conduct annual A) stress tests.to see if the banks have sufficient capital to operate under dire scenarios. B) stress tests to see if the banks buildings can withstand severe weather. C) management evaluations to see if the managers deserve bonuses. D) liability evaluations to make sure that they have sufficient insurance. Answer: A Ques Status: New AACSB: Application of Knowledge 25) The global financial crisis pointed out the need for consumer education and protection in financial areas such as mortgage loans. In response, with the passage of the Dodd-Frank legislation, Congress created A) the Consumer Financial Protection Bureau. B) the Internal Revenue Service. C) the Consumer Oversight Committee. D) the lender of last resort. Answer: A Ques Status: New AACSB: Reflective Thinking 26) Consumer protection legislation includes legislation to A) reduce discrimination in credit markets. B) require banks to make loans to everyone who applies. C) reduce the amount of interest that bank's can charge on loans. D) require banks to make periodic reports to the Better Business Bureau. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking

27) An important factor in producing the global financial crisis was A) lax consumer protection regulation. B) onerous rules placed on mortgage originators. C) weak incentives for mortgage brokers to use complicated mortgage products. D) strong incentives for the mortgage brokers to verify income information. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 28) Competition between banks A) encourages greater risk taking. B) encourages conservative bank management. C) increases bank profitability. D) eliminates the need for government regulation. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 29) Regulations that reduced competition between banks included A) branching restrictions. B) bank reserve requirements. C) the dual system of granting bank charters. D) interest-rate ceilings. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 30) The ________ that required separation of commercial and investment banking was repealed in 1999. A) the Federal Reserve Act. B) the Glass-Steagall Act. C) the Bank Holding Company Act. D) the Monetary Control Act. Answer: B Ques Status: Previous Edition AACSB: Application of Knowledge 31) Which of the following is NOT a reason financial regulation and supervision is difficult in real life? A) Financial institutions have strong incentives to avoid existing regulations. B) Unintended consequences may happen if details in the regulations are not precise. C) Regulated firms lobby politicians to lean on regulators to ease the rules. D) Financial institutions are not required to follow the rules. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 14 Copyright © 2019 Pearson Education, Inc.

32) Who has regulatory responsibility when a bank operates branches in many countries? A) It is not always clear. B) the WTO C) the U.S. Federal Reserve System D) the first country to submit an application Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 33) The collapse of the Bank of Credit and Commerce International, BCCI, showed the difficulty of international banking regulation. BCCI operated in more than ________ countries and was supervised by the small country of ________. A) 70; Luxembourg B) 100; Monaco C) 70; Monaco D) 100; Luxembourg Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 34) Agreements such as the ________ are attempts to standardize international banking regulations. A) Basel Accord B) UN Bank Accord C) GATT Accord D) WTO Accord Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 35) The Basel Committee ruled that regulators in other countries can ________ the operations of a foreign bank if they believe that it lacks effective oversight. A) restrict B) encourage C) renegotiate D) enhance Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge

10.3 Web Appendix 1: The 1980s Banking and Savings and Loan Crisis 1) In the ten year period 1981-1990, the rate of commercial bank failures was approximately ________ times greater than that in the period from 1934 to 1980. A) two B) three C) five D) ten Answer: D Ques Status: Revised AACSB: Application of Knowledge 2) Moral hazard and adverse selection problems increased in prominence in the 1980s A) as deregulation required savings and loans and mutual savings banks to be more cautious. B) following a burst of financial innovation in the 1970s and early 1980s that produced new financial instruments and markets, thereby widening the scope for risk taking. C) following a decrease in federal deposit insurance from $100,000 to $40,000. D) as interest rates were sharply decreased to bring down inflation. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 3) During the 1960s, 1970s, and early 1980s, traditional bank profitability declined because of A) financial innovation that increased competition from new financial institutions. B) a decrease in interest rates to fight the inflation problem. C) a decrease in deposit insurance. D) increased regulation that prohibited banks from making risky real estate loans. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 4) The Depository Institutions Deregulation and Monetary Control Act of 1980 A) separated investment banks and commercial banks. B) restricted the use of ATS accounts. C) imposed restrictive usury ceilings on large agricultural loans. D) increased deposit insurance from $40,000 to $100,000. Answer: D Ques Status: Previous Edition AACSB: Application of Knowledge

5) Prior to the 1980s, S&Ls and mutual savings banks were restricted almost entirely to A) commercial real estate loans. B) home mortgages. C) education loans. D) vacation loans. Answer: B Ques Status: Previous Edition AACSB: Application of Knowledge 6) One of the problems experienced by the savings and loan industry during the 1980s was A) managers lack of expertise to manage risk in new lines of business. B) heavy regulations in the new areas open to S&Ls. C) slow growth in lending. D) close monitoring by the FSLIC. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 7) In the early stages of the 1980s banking crisis, financial institutions were especially harmed by A) declining interest rates from late 1979 until 1981. B) the severe recession in 1981-82. C) the disinflation from mid 1980 to early 1983. D) the increase in energy prices in the early 80s. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 8) When regulators chose to allow insolvent S&Ls to continue to operate rather than to close them, they were pursuing a policy of A) regulatory forbearance. B) regulatory kindness. C) ostrich reasoning. D) ignorance reasoning. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 9) Savings and loan regulators allowed S&Ls to include in their capital calculations a high value for intangible capital called A) goodwill. B) salvation. C) kindness. D) retribution. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 17 Copyright © 2019 Pearson Education, Inc.

10) Reasons regulators chose to follow regulatory forbearance rather than to close the insolvent S&Ls include all of the following EXCEPT A) they had insufficient funds to close all of the insolvent S&Ls. B) they were friends with the S&L owners. C) they hoped the problem would go away. D) they did not have the authority to close the insolvent S&Ls. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 11) The policy of ________ exacerbated ________ problems as savings and loans took on increasingly huge levels of risk on the slim chance of returning to solvency. A) regulatory forbearance; moral hazard B) regulatory forbearance; adverse hazard C) regulatory agnosticism; moral hazard D) regulatory agnosticism; adverse hazard Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 12) Regulatory forbearance A) meant delaying the closing of "zombie S&Ls" as their losses mounted during the 1980s. B) had the advantage of benefiting healthy S&Ls at the expense of "zombie S&Ls," as insolvent institutions lost deposits to health institutions. C) had the advantage of permitting many insolvent S&Ls the opportunity to return to profitability, saving the FSLIC billions of dollars. D) increased adverse selection dramatically. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 13) The major provisions of the Competitive Equality Banking Act of 1987 include A) expanding the responsibilities of the FDIC, which is now the sole administrator of the federal deposit insurance system. B) the establishment of the Resolution Trust Corporation to manage and resolve insolvent thrifts placed in conservatorship or receivership. C) directing the Federal Home Loan Bank Board to continue to pursue regulatory forbearance. D) prompt corrective action when a bank gets in trouble. Answer: C Ques Status: Previous Edition AACSB: Application of Knowledge

14) The S&L Crisis can be analyzed as a principal-agent problem. The agents in this case, the ________, did not have the same incentive to minimize cost to the economy as the principals, the ________. A) politicians/regulators; taxpayers B) taxpayers; politician/regulators C) taxpayers; bank managers D) bank managers; politicians/regulators Answer: A Ques Status: Previous Edition AACSB: Ethical Understanding and Reasoning Abilities 15) "Bureaucratic gambling" refers to A) the strategy of thrift managers that they would not be audited by thrift regulators in the 1980s due to the relatively weak bureaucratic power of thrift regulators. B) the risk that thrift regulators took in publicizing the plight of the S&L industry in the early 1980s. C) the strategy adopted by thrift regulators of lowering capital requirements and pursuing regulatory forbearance in the 1980s in the hope that conditions in the S&L industry would improve. D) the risk that regulators took in going to Congress to ask for additional funds. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 16) That several hundred S&Ls were not even examined once in the period January 1984 through June 1986 can be explained by A) Congress's unwillingness to allocate the necessary funds to thrift regulators. B) regulators' reluctance to find the specific problem thrifts that they knew existed. C) slower growth in lending meant that less regulation was needed. D) Congress's unwillingness to listen to campaign contributors. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 17) The bailout of the savings and loan industry was much delayed and, therefore, much more costly to taxpayers because A) of regulators' initial attempts to downplay the seriousness of problems within the thrift industry. B) politicians listened to the taxpayers rather than the S&L lobbyists. C) Congress did not wait long enough for many of the problems in the thrift industry to correct themselves. D) regulators could not be fired, therefore, they didn't care if they did a good job or not. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking

18) An analysis of the political economy of the savings and loan crisis helps one to understand A) why politicians aided the efforts of thrift regulators, raising regulatory appropriations and encouraging closing of insolvent thrifts. B) why thrift regulators were so quick to inform Congress of the problems that existed in the thrift industry. C) why thrift regulators willingly acceded to pressures placed upon them by members of Congress. D) why politicians listened so closely to the taxpayers they represented. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 19) Taxpayers were served poorly by thrift regulators in the 1980s. This poor performance cannot be explained by A) regulators' desire to escape blame for poor performance, leading to a perverse strategy of "bureaucratic gambling." B) regulators' incentives to accede to pressures imposed by politicians, who sought to keep regulators from imposing tough regulations on institutions that were major campaign contributors. C) Congress's dogged determination to protect taxpayers from the unsound banking practices of managers at many of the nation's savings and loans. D) politicians strong incentives to act in their own interests rather than the interests of the taxpayers. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 20) The Federal Home Loan Bank Board and the FSLIC, both of which failed in their regulatory tasks, were abolished by the A) Competitive Equality Banking Act of 1987. B) Financial Institutions Reform, Recovery and Enforcement Act of 1989. C) Office of Thrift Supervision. D) Office of the Comptroller of the Currency. Answer: B Ques Status: Previous Edition AACSB: Application of Knowledge 21) The Resolution Trust Corporation was created by the FIRREA in order to A) manage and resolve insolvent S&Ls. B) build up trust in government regulation. C) regulate the S&L industry. D) purchase large amounts of government debt. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge

22) FIRREA increased the core-capital leverage requirement for thrift institutions from 3% to A) 8%. B) 5%. C) 10%. D) 25%. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 23) The Federal Deposit Insurance Corporation Improvement Act of 1991 A) increased the FDIC's ability to borrow from the Treasury to deal with failed banks. B) increased the FDIC's ability to use the too-big-to-fail doctrine. C) eliminated governmentally-administered deposit insurance. D) eliminated restrictions on nationwide banking. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 24) The ability to use the too-big-to-fail policy was curtailed by the passage of the FDICIA. To use this action today, the FDIC must get approval of a two-thirds majority of both the Board of Governors of the Federal Reserve and the directors of the FDIC and also the approval of the A) Secretary of the Treasury. B) Senate Finance Committee Chairperson. C) President of the United States. D) governor of the state in which the failed bank is located. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 25) The directive of prompt corrective action means that A) the FDIC will intervene earlier and more vigorously when a bank gets into trouble. B) the banks must take actions quickly to resolve reserve disputes. C) bank failures cannot occur. D) there must be an immediate response to an increase in interest rates. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 26) FDICIA ________ incentives for banks to hold capital and ________ incentives to take on excessive risk. A) increased; decreased B) increased; increased C) decreased; decreased D) decreased; increased Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 21 Copyright © 2019 Pearson Education, Inc.

27) How did the increase in the interest rates in the early 80s contribute to the S&L crisis? Answer: The S&Ls suffered from an interest-rate risk problem. They had many fixed-rate mortgages with low interest rates. As interest rates in the economy began to climb, S&Ls began to lose profitability. Because of deregulation and financial innovation, it became possible for the S&Ls to undertake more risky ventures to try to regain their profitability. Many of them lacked expertise in judging credit risk in the new loan areas resulting in large losses. Ques Status: Previous Edition AACSB: Reflective Thinking 10.4 Web Appendix 2: Banking Crises Throughout the World 1) The evidence from banking crises in other countries indicates that A) deposit insurance is to blame in each country. B) a government safety net for depositors need not increase moral hazard. C) regulatory forbearance never leads to problems. D) deregulation combined with poor regulatory supervision raises moral hazard incentives. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 2) All of the following are common to banking crises in different countries EXCEPT A) financial liberalization or innovation. B) weak bank regulatory systems. C) a government safety net. D) a dual banking system. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 3) A common element in all of the banking crisis episodes in different countries is A) the existence of a government safety net. B) deposit insurance. C) increased regulation. D) lack of competition. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 4) As in the United States, an important factor in the banking crises in Norway, Sweden, and Finland was the A) financial liberalization that occurred in the 1980s. B) decline in real interest rates that occurred in the 1980s. C) high inflation that occurred in the 1980s. D) sluggish economic growth that occurred in the 1980s. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 22 Copyright © 2019 Pearson Education, Inc.

5) As in the United States, an important factor in the banking crises in Latin America was the A) financial liberalization that occurred in the 1980s. B) decline in real interest rates that occurred in the 1980s. C) high inflation that occurred in the 1980s. D) sluggish economic growth that occurred in the 1980s. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 6) The Argentine banking crisis of 2001 resulted from Argentina's banks being required to A) purchase large amounts of government debt. B) pay back the value of failed loans. C) make risky real estate loans. D) make loans to only state-owned businesses. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 7) When comparing the banking crisis in the United States to the crises in Latin America, cost to the taxpayers of the government bailouts was A) higher in Latin American than in the United States. B) higher in the United States than in Latin America. C) about the same in both Latin America and the United States. D) positive in Latin America but negative in the United States. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 8) The Japanese banking system went through a cycle of ________ in the 1990s similar to the one that occurred in the U.S. in the 1980s. A) regulatory forbearance B) policy antagonism C) regulatory ignorance D) policy renewal Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 9) China is trying to move its banking system from being strictly ________ owned by having them issue shares overseas. A) state B) domestic investor C) depositor D) domestic corporate Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 23 Copyright © 2019 Pearson Education, Inc.

10) Banking crises have occurred throughout the world. What similarities do we find when we look at the different countries? Answer: Financial deregulation with inadequate supervision can lead to increased moral hazard as banks take on more risk. Although deposit insurance was not necessarily a major factor in every country's bank crisis, there was always some kind of government safety net. The presence of the government safety net also leads to increased risk-taking from the banks. Ques Status: Previous Edition AACSB: Reflective Thinking

Economics of Money, Banking, and Financial Markets, 12e (Mishkin) Chapter 11 Banking Industry: Structure and Competition 11.1 Historical Development of the Banking System 1) The modern commercial banking system began in America when the A) Bank of United States was chartered in New York in 1801. B) Bank of North America was chartered in Philadelphia in 1782. C) Bank of United States was chartered in Philadelphia in 1801. D) Bank of North America was chartered in New York in 1782. Answer: B Ques Status: Previous Edition AACSB: Application of Knowledge 2) A major controversy involving the banking industry in its early years was A) whether banks should both accept deposits and make loans or whether these functions should be separated into different institutions. B) whether the federal government or the states should charter banks. C) what percent of deposits banks should hold as fractional reserves. D) whether banks should be allowed to issue their own bank notes. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 3) The government institution that has responsibility for the amount of money and credit supplied in the economy as a whole is the A) central bank. B) commercial bank. C) bank of settlement. D) monetary fund. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 4) Because of the abuses by state banks and the clear need for a central bank to help the federal government raise funds during the War of 1812, Congress created the A) Bank of United States in 1812. B) Bank of North America in 1814. C) Second Bank of the United States in 1816. D) Second Bank of North America in 1815. Answer: C Ques Status: Previous Edition AACSB: Application of Knowledge

5) The Second Bank of the United States was denied a new charter by A) President Andrew Jackson. B) Vice President John Calhoun. C) President Benjamin Harrison. D) President John Q. Adams. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 6) Currency circulated by banks that could be redeemed for gold was called A) junk bonds. B) banknotes. C) gold bills. D) state money. Answer: B Ques Status: Previous Edition AACSB: Application of Knowledge 7) To eliminate the abuses of the state-chartered banks, the ________ created a new banking system of federally chartered banks, supervised by the ________. A) National Bank Act of 1863; Office of the Comptroller of the Currency B) Federal Reserve Act of 1863; Office of the Comptroller of the Currency C) National Bank Act of 1863; Office of Thrift Supervision D) Federal Reserve Act of 1863; Office of Thrift Supervision Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 8) The belief that bank failures were regularly caused by fraud or the lack of sufficient bank capital explains, in part, the passage of A) the National Bank Charter Amendments of 1918. B) the Garn-St. Germain Act of 1982. C) the National Bank Act of 1863. D) Federal Reserve Act of 1913. Answer: C Ques Status: Previous Edition AACSB: Application of Knowledge 9) Before 1863 A) federally-chartered banks had regulatory advantages not granted to state-chartered banks. B) the number of federally-chartered banks grew at a much faster rate than at any other time since the end of the Civil War. C) banks acquired funds by issuing banknotes. D) banks were required to maintain 100% of their deposits as reserves. Answer: C Ques Status: Previous Edition AACSB: Application of Knowledge 2 Copyright © 2019 Pearson Education, Inc.

10) Prior to 1863, all commercial banks in the United States A) were chartered by the U.S. Treasury Department. B) were chartered by the banking commission of the state in which they operated. C) were regulated by the Federal Reserve. D) were regulated by the central bank. Answer: B Ques Status: Previous Edition AACSB: Application of Knowledge 11) Although the National Bank Act of 1863 was designed to eliminate state-chartered banks by imposing a prohibitive tax on banknotes, state banks were able to stay in business by A) issuing credit cards. B) ignoring the regulations. C) acquiring funds through deposits. D) branching into other states. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 12) The National Bank Act of 1863, and subsequent amendments to it A) created a banking system of state-chartered banks. B) established the Office of the Comptroller of the Currency. C) broadened the regulatory powers of the Federal Reserve. D) created insurance on deposit accounts. Answer: B Ques Status: Previous Edition AACSB: Application of Knowledge 13) Which regulatory body charters national banks? A) the Federal Reserve B) the FDIC C) the Comptroller of the Currency D) the U.S. Treasury Answer: C Ques Status: Previous Edition AACSB: Application of Knowledge 14) The regulatory system that has evolved in the United States whereby banks are regulated at the state level, the national level, or both, is known as a A) bilateral regulatory system. B) tiered regulatory system. C) two-tiered regulatory system. D) dual banking system. Answer: D Ques Status: Previous Edition AACSB: Application of Knowledge 3 Copyright © 2019 Pearson Education, Inc.

15) Today the United States has a dual banking system in which banks supervised by the ________ and by the ________ operate side by side. A) federal government; municipalities B) state governments; municipalities C) federal government; states D) municipalities; states Answer: C Ques Status: Previous Edition AACSB: Application of Knowledge 16) The U.S. banking system is considered to be a dual system because A) banks offer both checking and savings accounts. B) it actually includes both banks and thrift institutions. C) it is regulated by both state and federal governments. D) it was established before the Civil War, requiring separate regulatory bodies for the North and South. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 17) The Federal Reserve Act of 1913 required that A) state banks be subject to the same regulations as national banks. B) national banks establish branches in the cities containing Federal Reserve banks. C) national banks join the Federal Reserve System. D) state banks could not join the Federal Reserve System. Answer: C Ques Status: Previous Edition AACSB: Application of Knowledge 18) The Federal Reserve Act of 1913 required all ________ banks to become members of the Federal Reserve System, while ________ banks could choose to become members of the system. A) state; national B) state; municipal C) national; state D) national; municipal Answer: C Ques Status: Previous Edition AACSB: Application of Knowledge

19) Probably the most significant factor explaining the drastic drop in the number of bank failures since the Great Depression has been A) the creation of the FDIC. B) rapid economic growth since 1941. C) the employment of new procedures by the Federal Reserve. D) better bank management. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 20) With the creation of the Federal Deposit Insurance Corporation, member banks of the Federal Reserve System ________ to purchase FDIC insurance for their depositors, while nonmember commercial banks ________ to buy deposit insurance. A) could choose; were required B) could choose; were given the option C) were required; could choose D) were required; were required Answer: C Ques Status: Previous Edition AACSB: Application of Knowledge 21) With the creation of the Federal Deposit Insurance Corporation A) member banks of the Federal Reserve System were given the option to purchase FDIC insurance for their depositors, while non-member commercial banks were required to buy deposit insurance. B) member banks of the Federal Reserve System were required to purchase FDIC insurance for their depositors, while non-member commercial banks could choose to buy deposit insurance. C) both member and non-member banks of the Federal Reserve System were required to purchase FDIC insurance for their depositors. D) both member and non-member banks of the Federal Reserve System could choose, but were not required, to purchase FDIC insurance for their depositors. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 22) The Glass-Steagall Act, before its repeal in 1999, prohibited commercial banks from A) issuing equity to finance bank expansion. B) engaging in underwriting and dealing of corporate securities. C) selling new issues of government securities. D) purchasing any debt securities. Answer: B Ques Status: Previous Edition AACSB: Application of Knowledge

23) The legislation that separated investment banking from commercial banking until its repeal in 1999 is known as the A) National Bank Act of 1863. B) Federal Reserve Act of 1913. C) Glass-Steagall Act. D) McFadden Act. Answer: C Ques Status: Previous Edition AACSB: Application of Knowledge 24) Which of the following statements concerning bank regulation in the United States is TRUE? A) The Office of the Comptroller of the Currency has the primary responsibility for state banks that are members of the Federal Reserve System. B) The Federal Reserve and the state banking authorities jointly have responsibility for the state banks that are members of the Federal Reserve System. C) The Office of the Comptroller of the Currency has sole regulatory responsibility over bank holding companies. D) The state banking authorities have sole regulatory responsibility for all state banks. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 25) Which bank regulatory agency has the sole regulatory authority over bank holding companies? A) the FDIC B) the Comptroller of the Currency C) the FHLBS D) the Federal Reserve System Answer: D Ques Status: Previous Edition AACSB: Application of Knowledge 26) State banks that are not members of the Federal Reserve System are most likely to be examined by the A) Federal Reserve System. B) FDIC. C) FHLBS. D) Comptroller of the Currency. Answer: B Ques Status: Previous Edition AACSB: Application of Knowledge

27) State banking authorities have sole jurisdiction over state banks A) without FDIC insurance. B) that are not members of the Federal Reserve System. C) operating as bank holding companies. D) chartered in the 21st century. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 11.2 Financial Innovation and the Growth of the "Shadow Banking System" 1) Financial innovations occur because of financial institutions search for A) profits. B) fame. C) stability. D) recognition. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 2) ________ is the process of researching and developing profitable new products and services by financial institutions. A) Financial engineering B) Financial manipulation C) Customer manipulation D) Customer engineering Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 3) The most significant change in the economic environment that changed the demand for financial products in recent years has been A) the aging of the baby-boomer generation. B) the dramatic increase in the volatility of interest rates. C) the dramatic increase in competition from foreign banks. D) the deregulation of financial institutions. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking

4) In the 1950s the interest rate on three-month Treasury bills fluctuated between 1 percent and 3.5 percent; in the 1980s it fluctuated between ________ percent and ________ percent. A) 5; 15 B) 4; 11.5 C) 4; 18 D) 5; 10 Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 5) Uncertainty about interest-rate movements and returns is called A) market potential. B) interest-rate irregularities. C) interest-rate risk. D) financial creativity. Answer: C Ques Status: Previous Edition AACSB: Application of Knowledge 6) Rising interest-rate risk A) increased the cost of financial innovation. B) increased the demand for financial innovation. C) reduced the cost of financial innovation. D) reduced the demand for financial innovation. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 7) Adjustable rate mortgages A) protect households against higher mortgage payments when interest rates rise. B) keep financial institutions' earnings high even when interest rates are falling. C) benefit homeowners when interest rates are falling. D) generally have higher initial interest rates than on conventional fixed-rate mortgages. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 8) Adjustable rate mortgages A) reduce the interest-rate risk for financial institutions. B) benefit homeowners when interest rates rise. C) generally have higher initial interest rates than conventional fixed-rate mortgages. D) allow borrowers to avoid paying interest on portions of their mortgage loans. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking

9) The agreement to provide a standardized commodity to a buyer on a specific date at a specific future price is A) a put option. B) a call option. C) a futures contract. D) a mortgage-backed security. Answer: C Ques Status: Previous Edition AACSB: Application of Knowledge 10) An instrument developed to help investors and institutions hedge interest-rate risk is A) a debit card. B) a credit card. C) a financial derivative. D) a junk bond. Answer: C Ques Status: Previous Edition AACSB: Application of Knowledge 11) Financial instruments whose payoffs are linked to previously issued securities are called A) grandfathered bonds. B) financial derivatives. C) hedge securities. D) reversible bonds. Answer: B Ques Status: Previous Edition AACSB: Application of Knowledge 12) Both ________ and ________ were financial innovations that occurred because of interest rate volatility. A) adjustable-rate mortgages; commercial paper B) adjustable-rate mortgages; financial derivatives C) sweep accounts; financial derivatives D) sweep accounts; commercial paper Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 13) The most important source of the changes in supply conditions that stimulate financial innovation has been the A) deregulation of financial institutions. B) dramatic increase in the volatility of interest rates. C) improvement in information technology. D) dramatic increase in competition from foreign banks. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 9 Copyright © 2019 Pearson Education, Inc.

14) New computer technology has A) increased the cost of financial innovation. B) increased the demand for financial innovation. C) reduced the cost of financial innovation. D) reduced the demand for financial innovation. Answer: C Ques Status: Previous Edition AACSB: Information Technology 15) Credit cards date back to A) prior to the second World War. B) just after the second World War. C) the early 1950s. D) the late 1950s. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 16) A firm issuing credit cards earns income from A) loans it makes to credit card holders. B) subsidies from the local governments. C) payments made to it by manufacturers of the products sold in stores on credit card purchases. D) sales of the card in foreign countries. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 17) The entry of AT&T and GM into the credit card business is an indication of A) government's efforts to deregulate the provision of financial services. B) the rising profitability of credit card operations. C) the reduction in costs of credit card operations since 1990. D) the sale of unprofitable operations by Bank of America and Citicorp. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 18) A debit card differs from a credit card in that A) a debit card is a loan while for a credit card purchase, payment is made immediately. B) a debit card is a long-term loan while a credit card is a short-term loan. C) a credit card is a loan while for a debit card purchase, payment is made immediately. D) a credit card is a long-term loan while a debit card is a short-term loan. Answer: C Ques Status: Previous Edition AACSB: Application of Knowledge

19) Automated teller machines A) are more costly to use than human tellers, so banks discourage their use by charging more for use of ATMs. B) cost about the same to use as human tellers in banks, so banks discourage their use by charging more for use of ATMs. C) cost less than human tellers, so banks may encourage their use by charging less for using ATMs. D) cost nothing to use, so banks provide their services free of charge. Answer: C Ques Status: Previous Edition AACSB: Application of Knowledge 20) The declining cost of computer technology has made ________ a reality. A) brick and mortar banking B) commercial banking C) virtual banking D) investment banking Answer: C Ques Status: Previous Edition AACSB: Information Technology 21) Improved computer technology has made home banking a reality. Home banking has advantages for both the customer and the bank. A) It is more heavily regulated by the government and banks can lower transactions costs. B) It is more convenient for the customer and banks can charge customers higher convenience fees. C) It is harder to monitor customers and customers are limited to making transactions at specific times. D) It is more convenient for the customer and lowers transactions costs for the bank. Answer: D Ques Status: New AACSB: Information Technology 22) Automated teller machines (ATMs) are available for 24 hour a day use and can be placed in locations other than banks. These machines make banking A) difficult to maintain up-to-date balance sheets. B) frustrating for banks because they don't know how many customers will use the bank in the evening. C) less desirable for customers because they are confusing to use. D) more convenient for the customer. Answer: D Ques Status: New AACSB: Information Technology

23) So-called fallen angels differ from junk bonds in that A) junk bonds refer to newly issued bonds with low credit ratings, whereas fallen angels refer to previously issued bonds that have had their credit ratings fall below Baa. B) junk bonds refer to previously issued bonds that have had their credit ratings fall below Baa, whereas fallen angels refer to newly issued bonds with low credit ratings. C) junk bonds have ratings below Baa, whereas fallen angels have ratings below C. D) fallen angels have ratings below Baa, whereas junk bonds have ratings below C. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 24) Newly-issued high-yield bonds rated below investment grade by the bond-rating agencies are frequently referred to as A) municipal bonds. B) Yankee bonds. C) "fallen angels." D) junk bonds. Answer: D Ques Status: Previous Edition AACSB: Application of Knowledge 25) In 1977, he pioneered the concept of selling new public issues of junk bonds for companies that had not yet achieved investment-grade status. A) Michael Milken B) Roger Milliken C) Ivan Boesky D) Carl Icahn Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 26) One factor contributing to the rapid growth of the commercial paper market since 1970 is A) the fact that commercial paper has no default risk. B) improved information technology making it easier to screen credit risks. C) government regulation. D) FDIC insurance for commercial paper. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking

27) The development of money market mutual funds contributed to the growth of ________ since the money market mutual funds need to hold liquid, high-quality, short-terms assets. A) the commercial paper market B) the municipal bond market C) the corporate bond market D) the junk bond market Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 28) The process of transforming otherwise illiquid financial assets into marketable capital market instruments is known as A) securitization. B) internationalization. C) arbitrage. D) program trading. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 29) ________ is creating a marketable capital market instrument by bundling a portfolio of mortgage or auto loans. A) Diversification B) Arbitrage C) Computerization D) Securitization Answer: D Ques Status: Previous Edition AACSB: Application of Knowledge 30) The driving force behind the securitization of mortgages and automobile loans has been A) the rising regulatory constraints on substitute financial instruments. B) the desire of mortgage and auto lenders to exit this field of lending. C) the improvement in information technology. D) the relaxation of regulatory restrictions on credit card operations. Answer: C Ques Status: Previous Edition AACSB: Information Technology

31) Securitization is a process of asset transformation that involves a number of different financial institutions working together. These financial institutions are known collectively as the A) transformers. B) amalgamation. C) movers and shakers. D) shadow banking system. Answer: D Ques Status: Previous Edition AACSB: Application of Knowledge 32) Which of the following is NOT part of the shadow banking system? A) the transformer B) the servicer C) the bundler D) the distributor Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 33) Because of securitization, a new class of residential mortgages offered to borrowers with less-than-stellar credit records developed. These mortgages are known as A) risk-enhanced mortgages. B) subprime mortgages. C) bundled mortgages. D) adjustable-rate mortgages. Answer: B Ques Status: Previous Edition AACSB: Application of Knowledge 34) According to Edward Kane, because the banking industry is one of the most ________ industries in America, it is an industry in which ________ is especially likely to occur. A) competitive; loophole mining B) competitive; innovation C) regulated; loophole mining D) regulated; innovation Answer: C Ques Status: Previous Edition AACSB: Application of Knowledge 35) Loophole mining refers to financial innovation designed to A) hide transactions from the IRS. B) conceal transactions from the SEC. C) get around regulations. D) conceal transactions from the Treasury Department. Answer: C Ques Status: Previous Edition AACSB: Application of Knowledge 14 Copyright © 2019 Pearson Education, Inc.

36) Prior to 2008, bank managers looked on reserve requirements A) as a tax on deposits. B) as a subsidy on deposits. C) as a subsidy on loans. D) as a tax on loans. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 37) Prior to 2008, the bank's cost of holding reserves equaled A) the interest paid on deposits times the amount of reserves. B) the interest paid on deposits times the amount of deposits. C) the interest earned on loans times the amount of loans. D) the interest earned on loans times the amount on reserves. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 38) Prior to 1980, the Fed set an interest rate ________, a maximum limit, on the interest rate that could be paid on time deposits. A) floor B) ceiling C) wall D) window Answer: B Ques Status: Previous Edition AACSB: Application of Knowledge 39) The process in which people seeking higher yielding securities take their funds out of the banking system thus restricting the amount of funds banks can lend is called A) capital mobility. B) loophole mining. C) disintermediation. D) deposit jumping. Answer: C Ques Status: Previous Edition AACSB: Application of Knowledge 40) Money market mutual funds A) function as interest-earning checking accounts. B) are legally deposits. C) are subject to reserve requirements. D) have an interest-rate ceiling. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 15 Copyright © 2019 Pearson Education, Inc.

41) In September 2008, the Reserve Primary Fund, a money market mutual fund, found itself in the situation know as "breaking the buck." This means that A) they could no longer afford to redeem shares at the par value of $1. B) they required shareholders to contribute a dollar more in fees each month. C) shareholders were able to redeem shares for more than a $1. D) shares earned more than a dollar in interest. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 42) In this type of arrangement, any balances above a certain amount in a corporation's checking account at the end of the business day are "removed" and invested in overnight securities that pay the corporation interest. This innovation is referred to as a A) sweep account. B) share draft account. C) removed-repo account. D) stockman account. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 43) Sweep accounts which were created to avoid reserve requirements became possible because of a change in A) deposit ceilings. B) technology. C) government rules. D) bank mergers. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 44) Sweep accounts A) have made reserve requirements nonbinding for many banks. B) sweep funds out of deposit accounts into long-term securities. C) enable banks to avoid paying interest to corporate customers. D) reduce banks' assets. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking

45) Since 1974, commercial banks importance as a source of funds for nonfinancial borrowers A) has shrunk dramatically, from around 40 percent of total credit advanced to around 20 percent by 2017. B) has shrunk dramatically, from around 70 percent of total credit advanced to below 50 percent by 2017. C) has expanded dramatically, from around 50 percent of total credit advanced to above 70 percent by 2017. D) has expanded dramatically, from around 30 percent of total credit advanced to above 50 percent by 2017. Answer: A Ques Status: Revised AACSB: Reflective Thinking 46) In order to compete with changing market conditions in the 1980s, banks supported legislation to remove interest rate ceilings and to allow banks to pay interest on checking accounts. These actions A) lowered transactions costs for banks. B) raised the cost of acquiring funds for banks. C) made banks less competitive in the financial markets. D) raised the income banks received. Answer: B Ques Status: New AACSB: Reflective Thinking 47) Since 1980 A) banks have decreased risk taking to offset the decline in profits. B) banks have offset the decline in profits from traditional activities with increased income from off-balance-sheet activities. C) banks have offset the decline in profits from off-balance-sheet activities with increased income from traditional activities. D) bank profits have grown rapidly due to deregulation. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 48) Financial innovation has caused A) banks to suffer declines in their cost advantages in acquiring funds, although it has not caused a decline in income advantages. B) banks to suffer a simultaneous decline of cost and income advantages. C) banks to suffer declines in their income advantages in acquiring funds, although it has not caused a decline in cost advantages. D) banks to achieve competitive advantages in both costs and income. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking

49) Disintermediation resulted from A) interest rate ceilings combined with inflation-driven increases in interest rates. B) elimination of Regulation Q (the regulation imposing interest rate ceilings on bank deposits). C) increases in federal income taxes. D) reserve requirements. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 50) The experience of disintermediation in the banking industry illustrates that A) more regulation of financial markets may avoid such problems in the future. B) banks are unable to remain competitive with other financial intermediaries. C) consumers no longer desire the services that banks provide. D) markets invent alternatives to costly regulations. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 51) Banks responded to disintermediation by A) supporting the elimination of interest rate regulations, enabling them to better compete for funds. B) opposing the elimination of interest rate regulations, as this would increase their cost of funds. C) demanding that interest rate regulations be imposed on money market mutual funds. D) supporting the elimination of interest rate regulations, as this would reduce their cost of funds. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 52) One factor contributing to the decline in cost advantages that banks once had is the A) decline in the importance of checkable deposits from over 60 percent of banks' liabilities to 11 percent today. B) decline in the importance of savings deposits from over 60 percent of banks' liabilities to under 15 percent today. C) decline in the importance of checkable deposits from over 40 percent of banks' liabilities to 15 percent today. D) decline in the importance of savings deposits from over 40 percent of banks' liabilities to under 20 percent today. Answer: A Ques Status: Revised AACSB: Reflective Thinking

53) The most important developments that reduced banks cost advantages include A) the growth of the junk bond market. B) the competition from money market mutual funds. C) the growth of securitization. D) the growth in the commercial paper market. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 54) The most important developments that reduced banks' income advantages include A) the increase in off-balance sheet activities. B) the growth of securitization. C) the elimination of Regulation Q ceilings. D) the competition from money market mutual funds. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 55) Banks have attempted to maintain adequate profit levels by A) making fewer riskier loans, such as commercial real estate loans. B) pursuing new off-balance-sheet activities. C) increasing reserve deposits at the Fed. D) decreasing capital accounts. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 56) The decline in traditional banking internationally can be attributed to A) increased regulation. B) improved information technology. C) increasing monopoly power of banks over depositors. D) increased protection from competition. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 57) Why did the interest rate volatility of the 1970s spur financial innovation? Answer: Banks were very vulnerable to interest-rate risk in the mortgage loans. To protect themselves, banks began to issue adjustable-rate mortgages whose interest rate will increase along with market interest rates. Additionally financial derivatives were developed to help hedge against interest-rate risk. Ques Status: Previous Edition AACSB: Reflective Thinking

11.3 Structure of the U.S. Commercial Banking Industry 1) The presence of so many commercial banks in the United States is most likely the result of A) consumers' strong desire for dealing with only local banks. B) adverse selection and moral hazard problems that give local banks a competitive advantage over larger banks. C) prior regulations that restricted the ability of these financial institutions to open branches. D) consumers' preference for state banks. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 2) The McFadden Act of 1927 A) effectively prohibited banks from branching across state lines. B) required that banks maintain bank capital equal to at least 6 percent of their assets. C) effectively required that banks maintain a correspondent relationship with large money center banks. D) separated the commercial banks and investment banks. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 3) The legislation that effectively prohibited banks from branching across state lines and forced all national banks to conform to the branching regulations in the state in which they reside is the A) McFadden Act. B) National Bank Act. C) Glass-Steagall Act. D) Garn-St.Germain Act. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 4) The large number of banks in the United States is an indication of A) vigorous competition within the banking industry. B) lack of competition within the banking industry. C) only efficient banks operating within the United States. D) consumer preference for local banks. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking

5) Lack of competition in the United States banking industry can be attributed to A) the fact that competition does not benefit consumers. B) the fact that branching has eliminated competition. C) recent legislation restricting competition. D) nineteenth-century populist sentiment. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 6) Which of the following is a TRUE statement concerning bank holding companies? A) Bank holding companies own few large banks. B) Bank holding companies have experienced dramatic growth in the past three decades. C) The McFadden Act has prevented bank holding companies from establishing branch banks. D) Bank holding companies can own only banks. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 7) A financial innovation that developed as a result of banks avoidance of bank branching restrictions was A) money market mutual funds. B) commercial paper. C) junk bonds. D) bank holding companies. Answer: D Ques Status: Previous Edition AACSB: Application of Knowledge 8) ATMs were developed because of breakthroughs in technology and as a A) means of avoiding restrictive branching regulations. B) means of avoiding paying interest to corporate customers. C) way of concealing transactions from the SEC. D) increasing the competition from foreign banks. Answer: A Ques Status: Previous Edition AACSB: Information Technology 9) Financial innovations that grew out of the bank branching restrictions were A) bank holding companies and automated teller machines. B) bank holding companies and securitization. C) automated teller machines and sweep accounts. D) automated teller machines and bank credit cards. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking

10) What financial innovations helped banks to get around the bank branching restrictions of the McFadden Act? Answer: The introduction of the automated teller machine allowed a bank's customers to have access to funds from various locations not just the bank building and was not subject to the branching restrictions. Bank holding companies could own controlling interest in several banks and other companies related to banking. Ques Status: Previous Edition AACSB: Reflective Thinking 11.4 Bank Consolidation and Nationwide Banking 1) The primary reason for the recent reduction in the number of banks is A) bank failures. B) re-regulation of banking. C) restrictions on interstate branching. D) bank consolidation. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 2) Bank holding companies that rival money center banks in size, but are not located in money center cities are A) superregional banks. B) bank clearing houses. C) international banks. D) local banks. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 3) Allowing bank branching across state lines gives banks greater ability to coordinate bank operations. This makes it easier for them to receive the benefits of A) the dual banking system. B) economies of scale. C) disintermediation. D) interest-rate irregularities. Answer: B Ques Status: Previous Edition AACSB: Application of Knowledge

4) The ability to use one resource to provide different products and services is A) economies of scale. B) economies of scope. C) diversification. D) vertical integration. Answer: B Ques Status: Previous Edition AACSB: Application of Knowledge 5) The business term for economies of scope is A) economies of scale. B) diversification. C) cooperation. D) synergies. Answer: D Ques Status: Previous Edition AACSB: Application of Knowledge 6) The legislation that overturned the prohibition on interstate banking is A) the McFadden Act. B) the Gramm-Leach-Bliley Act. C) the Glass-Steagall Act. D) the Riegle-Neal Act. Answer: D Ques Status: Previous Edition AACSB: Application of Knowledge 7) Although it has a population about half that of the United States, Japan has A) many more banks. B) about 25 percent of the number of banks. C) more than 5,000 commercial banks. D) fewer than 100 commercial banks. Answer: D Ques Status: Previous Edition AACSB: Application of Knowledge 8) Experts predict that the future structure of the U.S. banking industry will have A) an increased number of banks. B) as few as ten banks. C) several thousand banks. D) a few hundred banks. Answer: C Ques Status: Previous Edition AACSB: Application of Knowledge

9) Bank consolidation will likely result in A) less competition. B) the elimination of community banks. C) increased competition. D) a shift in assets from larger banks to smaller banks. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 10) Critics of nationwide banking fear A) an elimination of community banks. B) increased lending to small businesses. C) cutthroat competition. D) banks with economies of scale problems. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 11) One of the concerns of increased bank consolidation is the reduction in community banks which could result in A) less lending to small businesses. B) loss of cultural identity. C) higher interest rates. D) more bank regulation. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 12) Nationwide banking might reduce bank failures due to A) reduced competition. B) reduced lending to small businesses. C) diversification of loan portfolios across state lines. D) elimination of community banks. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 13) As the banking system in the United States evolves, it is expected that A) the number and importance of small banks will increase. B) the number and importance of large banks will decrease. C) small banks will grow at the expense of large banks. D) the number and importance of large banks will increase. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking

11.5 Separation of the Banking and Other Financial Service Industries 1) The legislation overturning the Glass-Steagall Act is A) the McFadden Act. B) the Gramm-Leach-Bliley Act. C) the Garn-St. Germain Act. D) the Riegle-Neal Act. Answer: B Ques Status: Previous Edition AACSB: Application of Knowledge 2) Under the Gramm-Leach-Bliley Act states retain regulatory authority over A) bank holding companies. B) securities activities. C) insurance activities. D) bank subsidiaries engaged in securities underwriting. Answer: C Ques Status: Previous Edition AACSB: Application of Knowledge 3) Under the Gramm-Leach-Bliley Act the oversight of the securities activities of bank holding companies belongs to A) the SEC. B) the Comptroller of the Currency. C) the U.S. Treasury. D) the Federal Reserve. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 4) As a result of the global financial crisis several of the large, free-standing investment banking firms chose to become bank holding companies. This means that they will now be regulated by A) the Federal Reserve. B) the FDIC. C) the state banking authorities. D) the Treasury. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge

5) In a ________ banking system, commercial banks provide a full range of banking, securities, and insurance services, all within a single legal entity. A) universal B) severable C) barrier-free D) dividerless Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 6) In a ________ banking system, commercial banks engage in securities underwriting, but legal subsidiaries conduct the different activities. Also, banking and insurance are not typically undertaken together in this system. A) universal B) British-style universal C) short-fence D) compartmentalized Answer: B Ques Status: Previous Edition AACSB: Application of Knowledge 7) A major difference between the United States and Japanese banking systems is that A) American banks are allowed to hold substantial equity stakes in commercial firms, whereas Japanese banks cannot. B) Japanese banks are allowed to hold substantial equity stakes in commercial firms, whereas American banks cannot. C) bank holding companies are illegal in the United States. D) Japanese banks are usually organized as bank holding companies. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking

11.6 Thrift Industry: Regulation and Structure 1) Like the dual banking system for commercial banks, thrifts can have either ________ or ________ charters. A) state; federal B) state; local C) local; federal D) municipal; federal Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 2) The Federal Reserve makes discount loans to banks, and similarly, the FHLBS makes loans to savings and loan institutions. The Fed loans are expected to be repaid ________ while the FHLBS loans are ________. A) quickly; for longer periods of time B) when the bank becomes solvent; to be repaid quickly C) quickly; to be repaid when the S&L becomes solvent D) when the market rebounds; of short duration Answer: A Ques Status: New AACSB: Application of Knowledge 3) Thrift institutions include A) commercial banks. B) brokerage firms. C) insurance companies. D) mutual savings banks. Answer: D Ques Status: Previous Edition AACSB: Application of Knowledge 4) The FHLBS gives loans to S&Ls and thus performs a function similar to the ________ for commercial banks. A) Federal Reserve B) U.S. Treasury C) Office of the Comptroller of the Currency D) U.S. Mint Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge

5) Mutual savings banks are owned by A) shareholders. B) partners. C) depositors. D) foreign investors. Answer: C Ques Status: Previous Edition AACSB: Application of Knowledge 6) Mutual savings banks are primarily regulated by A) the states in which they are located. B) the Federal Reserve. C) the FDIC. D) the National Credit Union Administration. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 7) An essential characteristic of credit unions is that A) they are typically large. B) branching across state lines is prohibited. C) their lending is primarily for mortgage loans. D) they are organized for individuals with a common bond. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 8) ________ are the only depository institutions that are tax-exempt. A) Commercial banks B) Savings and loans C) Mutual savings banks D) Credit unions Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking

11.7 International Banking 1) The spectacular growth in international banking can be explained by A) the rapid growth in international trade. B) the 1988 Basel Agreement. C) the collapse of the Bretton Woods system. D) the creation of the World Trade Organization. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 2) What country is given credit for the birth of the Eurodollar market? A) the United States B) England C) the Soviet Union D) Japan Answer: C Ques Status: Previous Edition AACSB: Application of Knowledge 3) Deposits in European banks denominated in dollars for the purpose of international transactions are known as A) Eurodollars. B) European Currency Units. C) European Monetary Units. D) International Monetary Units. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 4) The main center of the Eurodollar market is A) London. B) Basel. C) Paris. D) New York. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 5) Eurodollars are A) dollar-dominated deposits held in banks outside the United States. B) deposits held by U.S. banks in Europe. C) deposits held by U.S. banks in foreign countries. D) dollar-dominated deposits held in U.S. banks by Europeans. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 29 Copyright © 2019 Pearson Education, Inc.

6) Reasons for holding Eurodollars include A) the fact that Eurodollar deposits are insured by the FDIC. B) the fact that dollars are widely used to conduct international transactions. C) the fact that minimum transaction sizes are very low, making Eurodollars an attractive savings instrument for consumers. D) the fact that Eurodollar deposits are heavily regulated. Answer: B Ques Status: Previous Edition AACSB: Application of Knowledge 7) An advantage to American banks from operating foreign branches is that Eurodollar deposits in offshore branches are A) not subject to reserve requirements. B) insured by the FDIC. C) subject to extensive regulatory supervision. D) all demand deposits that pay no interest. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 8) U.S. banks have most of their branches in A) Latin America, the Far East, the Caribbean, and London. B) Latin America, the Middle East, the Caribbean, and London. C) Mexico, the Middle East, the Caribbean, and London. D) South America, the Middle East, the Caribbean, and Canada. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 9) A(n) ________ is a subsidiary of a U.S. bank that is engaged primarily in international banking. A) Edge Act corporation B) Eurodollar agency C) universal bank D) McFadden corporation Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge

10) ________ within the U.S. can make loans to foreigners but cannot make loans to domestic residents. A) Edge Act corporations B) International Banking Facilities C) Universal banks D) Euro banks Answer: B Ques Status: Previous Edition AACSB: Application of Knowledge 11) ________ of a foreign bank operates in the U.S. but cannot accept deposits from domestic residents. A) An agency office B) A universal corporation C) A McFadden corporation D) A Basel branch Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 12) If a foreign bank operates a subsidiary bank in the U.S., the subsidiary bank is A) subject to the same regulations as a U.S. owned bank. B) only subject to the regulations of the country in which the foreign bank is chartered. C) restricted to making loans to only foreign citizens in the U.S. D) restricted to accepting deposits from foreign citizens living in the U.S. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 13) Foreign banks may engage in banking activities in the United States by opening all of the following EXCEPT A) an agency office of the foreign bank. B) a subsidiary U.S. bank. C) a branch of the foreign bank. D) a McFadden Corporation. Answer: D Ques Status: Previous Edition AACSB: Application of Knowledge

14) Since the passage of the International Banking Act of 1978, the competitive advantage enjoyed by foreign banks in the U.S. has been A) reduced. B) mildly expanded. C) completely eliminated. D) greatly expanded. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 15) In 2017, ________ of the ten largest banks in the world were not U.S. banks. A) nine B) two C) five D) seven Answer: A Ques Status: New AACSB: Reflective Thinking 16) Discuss three ways in which U.S. banks can become involved in international banking. Answer: United States banks could open a foreign branch of their bank. A U.S. bank holding company could purchase controlling interest in a foreign bank in a foreign country. A U.S. bank could open a Edge Act Corporation. A U.S. bank could open an International Banking Facility in the U.S. which accepts time deposits from foreigners and makes loans to foreigners in the U.S. Ques Status: Previous Edition AACSB: Application of Knowledge

Economics of Money, Banking, and Financial Markets, 12e (Mishkin) Chapter 12 Financial Crises 12.1 What is a Financial Crisis? 1) A major disruption in financial markets characterized by sharp declines in asset prices and firm failures is called a A) financial crisis. B) fiscal imbalance. C) free-rider problem. D) "lemons" problem. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 2) A financial crisis occurs when an increase in asymmetric information from a disruption in the financial system A) causes severe adverse selection and moral hazard problems that make financial markets incapable of channeling funds efficiently. B) allows for a more efficient use of funds. C) increases economic activity. D) reduces uncertainty in the economy and increases market efficiency. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 3) A serious consequence of a financial crisis is A) a contraction in economic activity. B) an increase in asset prices. C) financial engineering. D) financial globalization. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 4) ________ are asymmetric information problems that act as a barrier to efficient allocation of capital. A) Asset prices B) Credit imbalances C) Financial frictions D) Financial derivatives Answer: C Ques Status: Previous Edition AACSB: Application of Knowledge

12.2 Dynamics of Financial Crises 1) Financial crises in advanced economies might start from a A) debt deflation. B) currency crisis. C) mismanagement of financial innovations. D) currency mismatch. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 2) When financial institutions go on a lending spree and expand their lending at a rapid pace they are participating in a A) credit boom. B) credit bust. C) deleveraging. D) market race. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 3) When the value of loans begins to drop, the net worth of financial institutions falls causing them to cut back on lending in a process called A) deleveraging. B) releveraging. C) capitulation. D) deflation. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 4) When financial intermediaries deleverage, firms cannot fund investment opportunities resulting in A) a contraction of economic activity. B) an economic boom. C) an increased opportunity for growth. D) a call for government regulation. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking

5) When asset prices rise above their fundamental economic values, a(n) ________ occurs. A) asset-price bubble B) liability war C) decline in lending D) decrease in moral hazard Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 6) Most U.S. financial crises have started during periods of ________ either after the start of a recession, a stock market crash, or the failure of a major financial institution. A) high uncertainty B) low interest rates C) low asset prices D) high financial regulation Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 7) If uncertainty about banks' health causes depositors to begin to withdraw their funds from banks, the country experiences a(n) A) banking crisis. B) financial recovery. C) reduction of the adverse selection and moral hazard problems. D) increase in information available to investors. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 8) In a bank panic, the source of contagion is the A) free-rider problem. B) too-big-to-fail problem. C) transactions cost problem. D) asymmetric information problem. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking

9) Debt deflation occurs when A) an economic downturn causes the price level to fall and a deterioration in firms' net worth because of the increased burden of indebtedness. B) rising interest rates worsen adverse selection and moral hazard problems. C) lenders reduce their lending due to declining stock prices (equity deflation) that lowers the value of collateral. D) corporations pay back their loans before the scheduled maturity date. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 10) A substantial decrease in the aggregate price level that reduces firms' net worth may stall a recovery from a recession. This process is called A) debt deflation. B) moral hazard. C) insolvency. D) illiquidity. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 11) A possible sequence for the three stages of a financial crisis might be ________ leads to ________ leads to ________. A) asset price declines; banking crises; unanticipated decline in price level B) unanticipated decline in price level; banking crises; increase in interest rates C) banking crises; increase in interest rates; unanticipated decline in price level D) banking crises; increase in uncertainty; increase in interest rates Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 12) The economy recovers quickly from most recessions, but the increase in adverse selection and moral hazard problems in the credit markets caused by ________ led to the severe economic contraction known as The Great Depression. A) debt deflation B) illiquidity C) an improvement in banks' balance sheets D) increases in bond prices Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking

13) The ________, the difference between the interest rate on Baa corporate bonds and U.S. Treasury bonds. rose sharply during the Great Depression. A) credit boom B) credit spread C) adjustable-rate D) default swap Answer: B Ques Status: Previous Edition AACSB: Application of Knowledge 14) During the banking crisis of the Great Depression, more than ________ of all commercial banks in the United States failed. A) one-third B) one-half C) one-tenth D) one-fifth Answer: A Ques Status: New AACSB: Reflective Thinking 15) Typically, the economy recovers fairly quickly from a recession. Why did this NOT happen in the United States during the Great Depression? Answer: The 25% decline in the price level from 1930-1933 triggered a debt deflation. The loss of net worth increased adverse selection and moral hazard problems in the credit markets and increased and prolonged the economic contraction. Ques Status: Previous Edition AACSB: Reflective Thinking

12.3 The Global Financial Crisis of 2007-2009 1) ________ is a process of bundling together smaller loans (like mortgages) into standard debt securities. A) Securitization B) Origination C) Debt deflation D) Distribution Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 2) A ________ pays out cash flows from a collection of assets in different tranches, with the highest-rated tranch paying out first, while lower ones paid out less if there are losses on the underlying assets. A) collateralized debt obligation (CDO) B) adjustable-rate mortgage C) negotiable CD D) discount bond Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 3) The originate-to-distribute business model has a serious ________ problem since the mortgage broker has little incentive to make sure that the mortgagee is a good credit risk. A) principal-agent B) debt deflation C) democratization of credit D) collateralized debt Answer: A Ques Status: Previous Edition AACSB: Ethical Understanding and Reasoning Abilities 4) If mortgage brokers do not make a strong effort to evaluate whether the borrower can pay off a loan, this creates a A) severe adverse selection problem. B) decline in mortgage applications. C) call to deregulate the industry. D) decrease in the demand for houses. Answer: A Ques Status: Previous Edition AACSB: Ethical Understanding and Reasoning Abilities

5) Agency problems in the subprime mortgage market included all of the following EXCEPT A) homeowners could refinance their houses with larger loans when their homes appreciated in value. B) mortgage originators had little incentives to make sure that the mortgagee is a good credit risk. C) underwriters of mortgage-backed securities had weak incentives to make sure that the holders of the securities would be paid back. D) the evaluators of securities, the credit rating agencies, were subject to conflicts of interest. Answer: A Ques Status: Previous Edition AACSB: Ethical Understanding and Reasoning Abilities 6) The growth of the subprime mortgage market led to A) increased demand for houses and helped fuel the boom in housing prices. B) a decline in the housing industry because of higher default risk. C) a decrease in home ownership as investors chose other assets over housing. D) decreased demand for houses as the less credit-worthy borrowers could not obtain residential mortgages. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 7) When housing prices began to decline after their peak in 2006, many subprime borrowers found that their mortgages were "underwater." This meant that A) the value of the house fell below the amount of the mortgage. B) the basement flooded since they could not afford to fix the leaky plumbing. C) the roof leaked during a rainstorm. D) the amount that they owed on their mortgage was less than the value of their house. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 8) If a borrower takes out a $200 million loan in a repo agreement and is asked to post $220 million of mortgage-backed securities as collateral, the "haircut" is A) 5%. B) 10%. C) 20%. D) 50%. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking

9) As "haircuts" increased during 2007-2009, financial institutions found that to borrow the same loan amount now required ________ collateral. A) less B) no C) more D) default-free Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 10) Although the subprime mortgage market problem began in the United States, the first indication of the seriousness of the crisis began in A) Europe. B) Australia. C) China. D) South America. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 11) Which investment bank filed for bankruptcy on September 15, 2008 making it the largest bankruptcy filing in U.S. history? A) Lehman Brothers B) Merrill Lynch C) Bear Stearns D) Goldman Sachs Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 12) The global financial crisis of 2007-2009 not only led to a worldwide recession, but also a ________ in the European nations that use the euro currency. A) currency devaluation B) budget surplus C) sovereign debt crisis D) tax cut Answer: C Ques Status: Previous Edition AACSB: Application of Knowledge

13) The government passed the Economic Recovery Act in October 2008 to prevent the financial crisis from continuing to worsen. A controversial component of this act was the A) temporary decrease in the federal deposit insurance limit. B) sale of new subprime mortgage assets. C) borrowing of $150 million from AIG. D) Troubled Asset Relief Program (TARP). Answer: D Ques Status: Previous Edition AACSB: Application of Knowledge 14) During the "Great Recession" unemployment rates in the United States increased to A) over 10%. B) over 25%. C) 7.5%. D) 5%. Answer: A Ques Status: New AACSB: Reflective Thinking 15) The recession caused by the global financial crisis was severe, but much smaller in magnitude than the Great Depression. because A) of massive intervention by governments to prop up financial markets. B) the larger world population. C) modern technological inventions makes sustaining a crisis difficult. D) the Federal Reserve stayed out of the way during the most recent crisis. Answer: A Ques Status: New AACSB: Reflective Thinking

12.4 Response of Financial Regulation 1) Microprudential supervision focuses on the safety and soundness of A) individual financial institutions. B) the financial system as a whole. C) the shadow banking system. D) government credit agencies. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 2) Microprudential supervision does all of the following EXCEPT A) checking capital ratios of a bank. B) checking a bank's compliance with disclosure requirements. C) assessing the riskiness of an individual bank's activities. D) focusing on financial system liquidity. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 3) Macroprudential supervision policies try to prevent a leverage cycle by changing capital requirements so that they ________ during an expansion and ________ during a downturn. A) increase; decrease B) increase; increase C) decrease; increase D) decrease; decrease Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 4) In order to ensure that borrowers have an ability to repay residential mortgages, the new consumer protection legislation requires lenders to do all of the following EXCEPT A) verify the income of the borrower. B) verify the borrower's job status. C) check the credit history of the borrower. D) verify that the borrower can read and understand a loan contract. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking

5) The new Consumer Financial Protection Bureau is an independent agency but is funded and housed within A) the Treasury Department. B) the Federal Reserve. C) the SEC. D) the IRS. Answer: B Ques Status: Previous Edition AACSB: Application of Knowledge 6) The Dodd-Frank legislation of 2010 permanently increased the federal deposit insurance to A) $40,000. B) $100,000. C) $200,000. D) $250,000. Answer: D Ques Status: Previous Edition AACSB: Application of Knowledge 7) Firms that are designated as systemically important financial institutions (SIFIs) are subject to all of the following additional Federal Reserve regulations EXCEPT A) higher capital standards. B) stricter liquidity requirements. C) providing a plan for orderly liquidation if necessary. D) interest rate ceilings on time deposits. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 8) The Volcker Rule addresses the off-balance-sheet problem involving A) trading risks. B) selling loans. C) loan guarantees. D) interest rate risks. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 9) The Dodd-Frank bill created an agency to monitor markets for asset price bubbles and the buildup of systemic risk. This agency is called the A) Resolution Trust Authority. B) Board of Governors. C) Financial Stability Oversight Council. D) Macroprudential Supervisory Agency. Answer: C Ques Status: Previous Edition AACSB: Application of Knowledge 11 Copyright © 2019 Pearson Education, Inc.

10) Each year banks with assets over $10 billion are subject to an assessment of the sufficiency of their bank capital under severe macroeconomic conditions called a A) stress test. B) nuclear test. C) liability test. D) disclosure test. Answer: A Ques Status: New AACSB: Reflective Thinking 12.5 Too-Big-To-Fail and Future Regulation 1) One suggested method of dealing with the too-big-to-fail problem is to reimpose the restrictions that were in place under A) Glass-Steagall. B) McFadden. C) the Edge Act. D) the Federal Reserve Act. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 2) One suggested method of reducing excessive risk-taking by SIFIs is to require them to hold ________ capital when credit is expanding rapidly and ________ capital when credit is contracting. A) less; more B) more; no C) more; less D) less; no Answer: C Ques Status: Previous Edition AACSB: Application of Knowledge 3) Dodd-Frank addressed many of the issues that led to the financial crisis. Which of the following was NOT addressed by Dodd-Frank regulations? A) stricter consumer protection laws B) privately owned, government-sponsored enterprises (GSEs) such as Fannie Mae and Freddie Mac C) resolution authority over the large financial institutions D) higher requirements on firms dealing in derivatives Answer: B Ques Status: Previous Edition AACSB: Application of Knowledge

4) One of the concerns about the Orderly Liquidation Authority is that it would legitimize federal bailouts of large financial entities and thus increase the ________ problem. A) too-big-to-fail B) regulatory forbearance C) lemons D) fiduciary Answer: A Ques Status: New AACSB: Reflective Thinking

Economics of Money, Banking, and Financial Markets, 12e (Mishkin) Chapter 13 Central Banks and the Federal Reserve System 13.1 Origins of the Federal Reserve System 1) The First Bank of the United States A) was disbanded in 1811 when its charter was not renewed. B) had its charter renewal vetoed in 1832. C) was fundamental in helping the Federal Government finance the War of 1812. D) None of the above. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 2) The Second Bank of the United States A) was disbanded in 1811 when its charter was not renewed. B) had its charter renewal vetoed in 1832. C) is considered to be the primary cause of the bank panic of 1907. D) None of the above. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 3) The public's fear of centralized power and distrust of moneyed interests led to the demise of the first two experiments in central banking, otherwise known as A) the First Bank of the United States and the Second Bank of the United States. B) the First Bank of the United States and the Central Bank of the United States. C) the First Central Bank of the United States and the Second Central Bank of the United States. D) the First Bank of North America and the Second Bank of North America. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 4) The financial panic of 1907 resulted in such widespread bank failures and substantial losses to depositors that the American public finally became convinced that A) the First Bank of the United States had failed to serve as a lender of last resort. B) the Second Bank of the United States had failed to serve as a lender of last resort. C) the Federal Reserve System had failed to serve as a lender of last resort. D) a central bank was needed to prevent future panics. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking

5) What makes the Federal Reserve so unique compared to other central banks around the world is its A) centralized structure. B) decentralized structure. C) regulatory functions. D) monetary policy functions. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 13.2 Structure of the Federal Reserve System 1) Which of the following is NOT an entity of the Federal Reserve System? A) Federal Reserve Banks B) the Comptroller of the Currency C) the Board of Governors D) the Federal Open Market Committee Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 2) Which of the following is an entity of the Federal Reserve System? A) the U.S. Treasury Secretary B) the FOMC C) the Comptroller of the Currency D) the FDIC Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 3) The three largest Federal Reserve banks (New York, Chicago, and San Francisco) combined hold more than ________ percent of the assets of the Federal Reserve System. A) 25 B) 33 C) 50 D) 67 Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking

4) The Federal Reserve Banks are ________ institutions since they are owned by the ________. A) quasi-public; private commercial banks in the district where the Reserve Bank is located B) public; private commercial banks in the district where the Reserve Bank is located C) quasi-public; Board of Governors D) public; Board of Governors Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 5) Each Federal Reserve bank has nine directors. Of these ________ are appointed by the member banks and ________ are appointed by the Board of Governors. A) three; six B) four; five C) five; four D) six; three Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 6) The nine directors of the Federal Reserve Banks are split into three categories: ________ are professional bankers, ________ are leaders from industry, and ________ are to represent the public interest and are not allowed to be officers, employees, or stockholders of banks. A) 5; 2; 2 B) 2; 5; 2 C) 4; 2; 3 D) 3; 3; 3 Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 7) Member commercial banks have purchased stock in their district Fed banks; the dividend paid by that stock is limited by law to ________ percent annually. A) four B) five C) six D) eight Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking

8) The Federal Reserve Bank of ________ houses the open market desk. A) Boston B) New York C) Chicago D) San Francisco Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 9) The president from which Federal Reserve Bank always has a vote in the Federal Open Market Committee? A) Philadelphia B) Boston C) San Francisco D) New York Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 10) An important function of the regional Federal Reserve Banks is A) setting reserve requirements. B) clearing checks. C) determining monetary policy. D) setting margin requirements. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 11) Which of the following functions is NOT performed by any of the twelve regional Federal Reserve Banks? A) check clearing B) conducting economic research C) setting interest rates payable on time deposits D) issuing new currency Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 12) All ________ are required to be members of the Fed. A) state chartered banks B) national banks chartered by the Office of the Comptroller of the Currency C) banks with assets less than $100 million D) banks with assets less than $500 million Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 4 Copyright © 2019 Pearson Education, Inc.

13) Of all commercial banks, about ________ belong to the Federal Reserve System. A) 10% B) one half C) one third D) 90% Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 14) Prior to 1980, member banks left the Federal Reserve System due to A) the high cost of discount loans. B) the high cost of required reserves. C) a desire to avoid interest rate regulations. D) a desire to avoid credit controls. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 15) The Fed's support of the Depository Institutions Deregulation and Monetary Control Act of 1980 stemmed in part from its A) concern over declining Fed membership. B) belief that all banking regulations should be eliminated. C) belief that interest rate ceilings were too high. D) belief that depositors had to become more knowledgeable of banking operations. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 16) Banks subject to reserve requirements set by the Federal Reserve System include A) only nationally chartered banks. B) only banks with assets less than $100 million. C) only banks with assets less than $500 million. D) all banks whether or not they are members of the Federal Reserve System. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 17) The Depository Institutions Deregulation and Monetary Control Act of 1980 A) established higher reserve requirements for nonmember than for member banks. B) established higher reserve requirements for member than for nonmember banks. C) abolished reserve requirements. D) established uniform reserve requirements for all banks. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking

18) There are ________ members of the Board of Governors of the Federal Reserve System. A) 5 B) 7 C) 12 D) 19 Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 19) Members of the Board of Governors are A) chosen by the Federal Reserve Bank presidents. B) appointed by the newly elected president of the United States, as are cabinet positions. C) appointed by the president of the United States and confirmed by the Senate. D) never allowed to serve more than 7-year terms. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 20) Each governor on the Board of Governors can serve A) only one nonrenewable fourteen-year term. B) one full nonrenewable fourteen-year term plus part of another term. C) only one nonrenewable eight-year term. D) one full nonrenewable eight-year term plus part of another term. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 21) The Chairman of the Board of Governors is chosen from among the seven governors and serves a ________, renewable term. A) one-year B) two-year C) four-year D) eight-year Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 22) While the discount rate is "established" by the regional Federal Reserve Banks, in truth, the rate is determined by A) Congress. B) the president of the United States. C) the Senate. D) the Board of Governors. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 6 Copyright © 2019 Pearson Education, Inc.

23) Which of the followings is a duty of the Board of Governors of the Federal Reserve System? A) setting margin requirements, the fraction of the purchase price of the securities that has to be paid for with cash B) setting the maximum interest rates payable on certain types of time deposits under Regulation Q C) regulating credit with the approval of the president under the Credit Control Act of 1969 D) All governors advise the president of the United States on economic policy. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 24) Which of the followings is NOT a current duty of the Board of Governors of the Federal Reserve System? A) setting margin requirements, the fraction of the purchase price of the securities that has to be paid for with cash B) setting the maximum interest rates payable on certain types of time deposits under Regulation Q C) approving the discount rate "established" by the Federal Reserve banks D) voting on the conduct of open market operations Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 25) The Federal Open Market Committee usually meets ________ times a year. A) four B) six C) eight D) twelve Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 26) The Federal Reserve entity that makes decisions regarding the conduct of open market operations is the A) Board of Governors. B) chairman of the Board of Governors. C) Federal Open Market Committee. D) Open Market Advisory Council. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking

27) The Federal Open Market Committee consists of the A) five senior members of the seven-member Board of Governors. B) seven members of the Board of Governors and seven presidents of the regional Fed banks. C) seven members of the Board of Governors and five presidents of the regional Fed banks. D) twelve regional Fed bank presidents and the chairman of the Board of Governors. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 28) The majority of members of the Federal Open Market Committee are A) Federal Reserve Bank presidents. B) members of the Federal Advisory Council. C) presidents of member banks. D) the seven members of the Board of Governors. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 29) Each Fed bank president attends FOMC meetings; although only ________ Fed bank presidents vote on policy, all ________ provide input. A) three; ten B) five; ten C) three; twelve D) five; twelve Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 30) Although reserve requirements and the discount rate are not actually set by the ________, decisions concerning these policy tools are effectively made there. A) Federal Reserve Bank of New York B) Board of Governors C) Federal Open Market Committee D) Federal Reserve Banks Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 31) The research document given to the Federal Open Market Committee that contains information on the state of the economy in each Federal Reserve district is called the A) beige book. B) green book. C) blue book. D) black book. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 8 Copyright © 2019 Pearson Education, Inc.

32) The teal book is the Fed research document containing A) the forecast of national economic variables for the next three years. B) forecasts of the money aggregates conditional on different monetary policy stances. C) information on the state of the economy in each Federal Reserve district. D) both A and B. E) A, B and C. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 33) The Federal Open Market Committee's "balance of risks" is an assessment of whether, in the future, its primary concern will be A) higher exchange rates or higher unemployment. B) higher inflation or a stronger economy. C) higher inflation or a weaker economy. D) lower inflation or a stronger economy. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 34) Subject to the approval of the Board of Governors, the decision of choosing the president of a district Federal Reserve Bank is made by A) all nine district bank directors. B) the six district bank directors elected by the member banks. C) three district bank directors who are professional bankers. D) district bank directors who are not professional bankers. E) class A and class B directors. Answer: D Ques Status: Previous Edition AACSB: Ethical Understanding and Reasoning Abilities 35) Why does the Federal Reserve Bank of New York play a special role within the Federal Reserve System? Answer: The New York district contains the largest banks in the country. The New York Fed supervises and examines these banks to insure their soundness and the safety of the nation's financial system. The New York Fed conducts open market operations and foreign exchange transactions for the Fed and Treasury. The New York Fed belongs to the Bank for International Settlements, so its president and the chairman of the Board of Governors represent the U.S. at the monthly meetings of the world's central banks. The New York Fed president is the only president of a regional Fed who is a permanent voting member of the FOMC. Ques Status: Previous Edition AACSB: Reflective Thinking

36) Who are the voting members of the Federal Open Market Committee and why is this committee important? Where does the power lie within this committee? Answer: The FOMC determines the monetary policy of the United States through its decisions about open market operations. It also effectively determines the discount rate and reserve requirements. The seven members of the Board of Governors, the president of the New York Fed, and four of the other eleven regional bank presidents are voting members on a rotating basis. Within the FOMC, the chairman of the Board of Governors wields the power. Ques Status: Previous Edition AACSB: Reflective Thinking 13.3 How Independent is the Fed? 1) Instrument independence is the ability of ________ to set monetary policy ________. A) the central bank; goals B) Congress; goals C) Congress; instruments D) the central bank; instruments Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 2) The ability of a central bank to set monetary policy instruments is A) political independence. B) goal independence. C) policy independence. D) instrument independence. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 3) Goal independence is the ability of ________ to set monetary policy ________. A) the central bank; goals B) Congress; goals C) Congress; instruments D) the central bank; instruments Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 4) The ability of a central bank to set monetary policy goals is A) political independence. B) goal independence. C) policy independence. D) instrument independence. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 10 Copyright © 2019 Pearson Education, Inc.

5) Members of Congress are able to influence monetary policy, albeit indirectly, through their ability to A) withhold appropriations from the Board of Governors. B) withhold appropriations from the Federal Open Market Committee. C) propose legislation that would force the Fed to submit budget requests to Congress, as must other government agencies. D) instruct the General Accounting Office to audit the foreign exchange market functions of the Federal Reserve. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 6) Explain two concepts of central bank independence. Is the Fed politically independent? Why do economists think central bank independence is important? Answer: Instrument independence is the ability of the central bank to set its instruments, and goal independence is the ability of a central bank to set its goals. The Fed enjoys both types of independence. The Fed is largely independent of political pressure due to its earnings and the conditions of appointment of the Board of Governors and its chairman. However, some political pressure can be applied through the threat or enactment of legislation affecting the Fed. Independence is important because there is some evidence that independent central banks pursue lower rates of inflation without harming overall economic performance. Ques Status: Previous Edition AACSB: Reflective Thinking 13.4 Should the Fed Be Independent? 1) The case for Federal Reserve independence does NOT include the idea that A) political pressure would impart an inflationary bias to monetary policy. B) a politically insulated Fed would be more concerned with long-run objectives and thus be a defender of a sound dollar and a stable price level. C) policy is always performed better by an elite group such as the Fed. D) a Federal Reserve under the control of Congress or the president might make the so-called political business cycle more pronounced. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 2) The political business cycle refers to the phenomenon that just before elections, politicians enact ________ policies. After the elections, the bad effects of these policies (for example, ________ ) have to be counteracted with ________ policies. A) expansionary; higher unemployment; contractionary B) expansionary; a higher inflation rate; contractionary C) contractionary; higher unemployment; expansionary D) contractionary; a higher inflation rate; expansionary Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 11 Copyright © 2019 Pearson Education, Inc.

3) The strongest argument for an independent Federal Reserve rests on the view that subjecting the Fed to more political pressures would impart A) an inflationary bias to monetary policy. B) a deflationary bias to monetary policy. C) a disinflationary bias to monetary policy. D) a countercyclical bias to monetary policy. Answer: A Ques Status: Previous Edition AACSB: Ethical Understanding and Reasoning Abilities 4) Critics of the current system of Fed independence contend that A) the current system is undemocratic. B) voters have too much say about monetary policy. C) the president has too much control over monetary policy on a day-to-day basis. D) the Board of Governors is held responsible for policy missteps. Answer: A Ques Status: Previous Edition AACSB: Diverse and Multicultural Work Environments 5) Recent research indicates that inflation performance (low inflation) has been found to be best in countries with A) the most independent central banks. B) political control of monetary policy. C) money financing of budget deficits. D) a policy of always keeping interest rates low. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 6) Make the case for and against an independent Federal Reserve. Answer: Case for: 1. An independent Federal Reserve can shield the economy from the political business cycle, and it will be less likely to have an inflationary bias to monetary policy. 2. Control of the money supply is too important to leave to inexperienced politicians. Case against: 1. It is undemocratic to have monetary policy be controlled by a small number of individuals that are not accountable. 2. In the past, an independent Fed has not used its freedom wisely. 3. Its independence may encourage it to pursue its own self-interest rather than the public's interest. Ques Status: Previous Edition AACSB: Ethical Understanding and Reasoning Abilities

13.5 Explaining Central Bank Behavior 1) The theory of bureaucratic behavior suggests that the objective of a bureaucracy is to maximize A) the public's welfare. B) profits. C) its own welfare. D) conflict with the executive and legislative branches of government. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 2) The theory of bureaucratic behavior when applied to the Fed helps to explain why the Fed A) was supportive of congressional attempts to limit the central bank's autonomy. B) was so secretive about the conduct of future monetary policy. C) sought less control over banks in the 1980s. D) was willing to take on powerful groups that may threaten its autonomy. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 3) What is the theory of bureaucratic behavior and how can it be used to explain the behavior of the Federal Reserve? Answer: The theory of bureaucratic behavior concludes that the main objective of any bureaucracy is to maximize its own welfare, which is related to power and prestige. This can explain why the Federal Reserve has defended its autonomy, avoids conflict with Congress and the president, and its push to gain more control over banks. Ques Status: Previous Edition AACSB: Analytical Thinking

13.6 Structure and Independence of the European Central Bank 1) Under the European System of Central Banks, the Executive Board is similar in structure to the ________ of the Federal Reserve System. A) Board of Governors B) Federal Open Market Committee C) Federal Reserve Banks D) Federal Advisory Council Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 2) Under the European System of Central Banks, the Governing Council is similar in structure to the ________ of the Federal Reserve System. A) Board of Governors B) Federal Open Market Committee C) Federal Reserve Banks D) Federal Advisory Council Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 3) Under the European System of Central Banks, the National Central Banks have the same role as the ________ of the Federal Reserve System. A) Board of Governors B) Federal Open Market Committee C) Federal Reserve Banks D) Federal Advisory Council Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 4) Members of the Executive Board of the European System of Central Banks are appointed to ________ year, nonrenewable terms. A) four B) eight C) ten D) fourteen Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking

5) Which of the following statements comparing the European System of Central Banks and the Federal Reserve System is TRUE? A) The budgets of the Federal Reserve Banks are controlled by the Board of Governors, while the National Central Banks control their own budgets and the budget of the European Central Bank. B) The European Central Bank has similar power over the National Central Banks when compared to the level of power the Board of Governors has over the Federal Reserve Banks. C) Just like the Federal Reserve System, monetary operations are centralized in the European System of Central Banks with the European Central Bank. D) None of the above. Answer: A Ques Status: Revised AACSB: Reflective Thinking 6) The Governing Council usually meets ________ times a year. A) four B) six C) eight D) twelve Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 7) In the Governing Council, the decision of what policy to implement is made by A) majority vote of the Executive Board members. B) majority vote of the heads of the National Banks. C) consensus. D) majority vote of all members of the Governing Council. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 8) The central bank which is generally regarded as the most independent in the world because its charter cannot be changed by legislation is the A) Bank of England. B) Bank of Canada. C) European Central Bank. D) Bank of Japan. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking

9) Explain the similarities and differences between the European System of Central Banks and the Federal Reserve System. Answer: The similarities between the two are in their structure. The National Central Banks of the member countries of the Eurosystem have the same role as the Federal Reserve Banks in the Federal Reserve System. The Executive Board and the Governing Council of the Eurosystem resemble the Board of Governors and the Federal Open Market Committee of the Federal Reserve System, respectively. There are three major differences between the two. The first difference is concerning the control of the budgets. In the Fed, the Board of Governors controls the budgets of the Reserve Banks while in the Eurosystem, the National Banks control the budget of the European Central Bank. The second difference is the monetary operations of the Eurosystem are conducted by the National Banks, so they are not as centralized as the monetary operations in the Federal Reserve System. Ques Status: Revised AACSB: Reflective Thinking 13.7 Structure and Independence of Other Foreign Central Banks 1) On paper, the Bank of Canada has ________ instrument independence and ________ goal independence when compared to the Federal Reserve System. A) less; less B) less; more C) more; less D) more; more Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 2) The oldest central bank, having been founded in 1694, is the A) Bank of England. B) Deutsche Bundesbank. C) Bank of Japan. D) Federal Reserve System. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 3) While legislation enacted in 1998 granted the Bank of Japan new powers and greater autonomy, its critics contend that its independence is A) limited by the Ministry of Finance's veto power over a portion of its budget. B) too great because it need not pursue a policy of price stability even if that is the popular will of the people. C) too great since the Ministry of Finance no longer has veto power over the bank's budget. D) limited since the Ministry of Finance can dismiss senior bank officials. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 16 Copyright © 2019 Pearson Education, Inc.

4) Regarding central bank independence A) the Fed is more independent than the European Central Bank. B) the European Central Bank is more independent than the Fed. C) the trend in industrialized nations has been to reduce central bank independence. D) the Bank of England has the longest tradition of independence of any central bank in the world. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 5) The trend in recent years is that more and more governments A) have been granting greater independence to their central banks. B) have been reducing the independence of their central banks to make them more accountable for poor economic performance. C) have mandated that their central banks focus on controlling inflation. D) have required their central banks to cooperate more with their Ministers of Finance. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 6) Which of the following statements about central bank structure and independence is TRUE? A) In recent years, with the exception of the Bank of England and the Bank of Japan, most countries have reduced the independence of their central banks, subjecting them to greater democratic control. B) Before the Bank of England was granted greater independence, the Federal Reserve was the most independent of the world's central banks. C) Both theory and experience suggest that more independent central banks produce better monetary policy. D) While the European Central Bank is independent, it is not as independent as the Federal Reserve. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking

Economics of Money, Banking, and Financial Markets, 12e (Mishkin) Chapter 14 The Money Supply Process 14.1 Three Players in the Money Supply Process 1) The government agency that oversees the banking system and is responsible for the conduct of monetary policy in the United States is A) the Federal Reserve System. B) the United States Treasury. C) the U.S. Gold Commission. D) the House of Representatives. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 2) Individuals that lend funds to a bank by opening a checking account are called A) policyholders. B) partners. C) depositors. D) debt holders. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 3) The three players in the money supply process include A) banks, depositors, and the U.S. Treasury. B) banks, depositors, and borrowers. C) banks, depositors, and the central bank. D) banks, borrowers, and the central bank. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 4) Of the three players in the money supply process, most observers agree that the most important player is A) the United States Treasury. B) the Federal Reserve System. C) the FDIC. D) the Office of Thrift Supervision. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking

14.2 The Fed's Balance Sheet 1) Both ________ and ________ are Federal Reserve assets. A) currency in circulation; reserves B) currency in circulation; securities C) securities; loans to financial institutions D) securities; reserves Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 2) The monetary liabilities of the Federal Reserve include A) securities and loans to financial institutions. B) currency in circulation and reserves. C) securities and reserves. D) currency in circulation and loans to financial institutions. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 3) Both ________ and ________ are monetary liabilities of the Fed. A) securities; loans to financial institutions B) currency in circulation; reserves C) securities; reserves D) currency in circulation; loans to financial institutions Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 4) The sum of the Fed's monetary liabilities and the U.S. Treasury's monetary liabilities is called A) the money supply. B) currency in circulation. C) bank reserves. D) the monetary base. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 5) The monetary base consists of A) currency in circulation and Federal Reserve notes. B) currency in circulation and the U.S. Treasury's monetary liabilities. C) currency in circulation and reserves. D) reserves and Federal Reserve Notes. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 2 Copyright © 2019 Pearson Education, Inc.

6) Total reserves minus bank deposits with the Fed equals A) vault cash. B) excess reserves. C) required reserves. D) currency in circulation. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 7) Reserves are equal to the sum of A) required reserves and excess reserves. B) required reserves and vault cash reserves. C) excess reserves and vault cash reserves. D) vault cash reserves and total reserves. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 8) Total reserves are the sum of ________ and ________. A) excess reserves; borrowed reserves B) required reserves; currency in circulation C) vault cash; excess reserves D) excess reserves; required reserves Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 9) Excess reserves are equal to A) total reserves minus discount loans. B) vault cash plus deposits with Federal Reserve banks minus required reserves. C) vault cash minus required reserves. D) deposits with the Fed minus vault cash plus required reserves. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 10) Total Reserves minus vault cash equals A) bank deposits with the Fed. B) excess reserves. C) required reserves. D) currency in circulation. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking

11) The amount of deposits that banks must hold in reserve is A) excess reserves. B) required reserves. C) total reserves. D) vault cash. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 12) The percentage of deposits that banks must hold in reserve is the A) excess reserve ratio. B) required reserve ratio. C) total reserve ratio. D) currency ratio. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 13) Suppose that from a new checkable deposit, First National Bank holds two million dollars in vault cash, eight million dollars on deposit with the Federal Reserve, and one million dollars in required reserves. Given this information, we can say First National Bank has ________ million dollars in excess reserves. A) three B) nine C) ten D) eleven Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 14) Suppose that from a new checkable deposit, First National Bank holds two million dollars in vault cash, eight million dollars on deposit with the Federal Reserve, and one million dollars in required reserves. Given this information, we can say First National Bank faces a required reserve ratio of ________ percent. A) ten B) twenty C) eighty D) ninety Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking

15) Suppose that from a new checkable deposit, First National Bank holds two million dollars in vault cash, eight million dollars on deposit with the Federal Reserve, and nine million dollars in excess reserves. Given this information, we can say First National Bank has ________ million dollars in required reserves. A) one B) two C) eight D) ten Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 16) Suppose that from a new checkable deposit, First National Bank holds two million dollars in vault cash, eight million dollars on deposit with the Federal Reserve, and nine million dollars in excess reserves. Given this information, we can say First National Bank faces a required reserve ratio of ________ percent. A) ten B) twenty C) eighty D) ninety Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 17) Suppose that from a new checkable deposit, First National Bank holds eight million dollars on deposit with the Federal Reserve, one million dollars in required reserves, and faces a required reserve ratio of ten percent. Given this information, we can say First National Bank has ________ million dollars in excess reserves. A) two B) eight C) nine D) ten Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 18) Suppose that from a new checkable deposit, First National Bank holds eight million dollars on deposit with the Federal Reserve, one million dollars in required reserves, and faces a required reserve ratio of ten percent. Given this information, we can say First National Bank has ________ million dollars in vault cash. A) two B) eight C) nine D) ten Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 5 Copyright © 2019 Pearson Education, Inc.

19) Suppose that from a new checkable deposit, First National Bank holds two million dollars in vault cash, nine million dollars in excess reserves, and faces a required reserve ratio of ten percent. Given this information, we can say First National Bank has ________ million dollars in required reserves. A) one B) two C) eight D) ten Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 20) Suppose that from a new checkable deposit, First National Bank holds two million dollars in vault cash, nine million dollars in excess reserves, and faces a required reserve ratio of ten percent. Given this information, we can say First National Bank has ________ million dollars on deposit with the Federal Reserve. A) one B) two C) eight D) ten Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 21) Suppose that from a new checkable deposit, First National Bank holds two million dollars in vault cash, one million dollars in required reserves, and faces a required reserve ratio of ten percent. Given this information, we can say First National Bank has ________ million dollars in excess reserves. A) one B) two C) nine D) ten Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 22) Suppose that from a new checkable deposit, First National Bank holds two million dollars in vault cash, one million dollars in required reserves, and faces a required reserve ratio of ten percent. Given this information, we can say First National Bank has ________ million dollars on deposit with the Federal Reserve. A) one B) two C) eight D) ten Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 6 Copyright © 2019 Pearson Education, Inc.

23) Suppose that from a new checkable deposit, First National Bank holds eight million dollars on deposit with the Federal Reserve, nine million dollars in excess reserves, and faces a required reserve ratio of ten percent. Given this information, we can say First National Bank has ________ million dollars in required reserves. A) one B) two C) nine D) ten Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 24) Suppose that from a new checkable deposit, First National Bank holds eight million dollars on deposit with the Federal Reserve, nine million dollars in excess reserves, and faces a required reserve ratio of ten percent. Given this information, we can say First National Bank has ________ million dollars in vault cash. A) one B) two C) nine D) ten Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 25) The interest rate the Fed charges banks borrowing from the Fed is the A) federal funds rate. B) Treasury bill rate. C) discount rate. D) prime rate. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 26) When banks borrow money from the Federal Reserve, these funds are called A) federal funds. B) discount loans. C) federal loans. D) Treasury funds. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking

14.3 Control of the Monetary Base 1) The monetary base minus currency in circulation equals A) reserves. B) the borrowed base. C) the nonborrowed base. D) discount loans. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 2) The monetary base minus reserves equals A) currency in circulation. B) the borrowed base. C) the nonborrowed base. D) discount loans. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 3) High-powered money minus reserves equals A) reserves. B) currency in circulation. C) the monetary base. D) the nonborrowed base. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 4) High-powered money minus currency in circulation equals A) reserves. B) the borrowed base. C) the nonborrowed base. D) discount loans. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 5) Purchases and sales of government securities by the Federal Reserve are called A) discount loans. B) federal fund transfers. C) open market operations. D) swap transactions. Answer: C Ques Status: Previous Edition AACSB: Written and Oral Communication 8 Copyright © 2019 Pearson Education, Inc.

6) When the Federal Reserve purchases a government bond from a primary dealer, reserves in the banking system ________ and the monetary base ________, everything else held constant. A) increase; increases B) increase; decreases C) decrease; increases D) decrease; decreases Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 7) When the Federal Reserve sells a government bond to a primary dealer, reserves in the banking system ________ and the monetary base ________, everything else held constant. A) increase; increases B) increase; decreases C) decrease; increases D) decrease; decreases Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 8) When a primary dealer sells a government bond to the Federal Reserve, reserves in the banking system ________ and the monetary base ________, everything else held constant. A) increase; increases B) increase; decreases C) decrease; increases D) decrease; decreases Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 9) When a primary dealer buys a government bond from the Federal Reserve, reserves in the banking system ________ and the monetary base ________, everything else held constant. A) increase; increases B) increase; decreases C) decrease; increases D) decrease; decreases Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking

10) When the Fed buys $100 worth of bonds from a primary dealer, reserves in the banking system A) increase by $100. B) increase by more than $100. C) decrease by $100. D) decrease by more than $100. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 11) When the Fed sells $100 worth of bonds to a primary dealer, reserves in the banking system A) increase by $100. B) increase by more than $100. C) decrease by $100. D) decrease by more than $100. Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 12) When the Fed extends a $100 discount loan to the First National Bank, reserves in the banking system A) increase by $100. B) increase by more than $100. C) decrease by $100. D) decrease by more than $100. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 13) All else the same, when the Fed calls in a $100 discount loan previously extended to the First National Bank, reserves in the banking system A) increase by $100. B) increase by more than $100. C) decrease by $100. D) decrease by more than $100. Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking

14) When the Federal Reserve extends a discount loan to a bank, the monetary base ________ and reserves ________. A) remains unchanged; decrease B) remains unchanged; increase C) increases; increase D) increases; remain unchanged Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 15) When the Federal Reserve calls in a discount loan from a bank, the monetary base ________ and reserves ________. A) remains unchanged; decrease B) remains unchanged; increase C) decreases; decrease D) decreases; remains unchanged Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 16) If the Fed decides to reduce bank reserves, it can A) purchase government bonds. B) extend discount loans to banks. C) sell government bonds. D) print more currency. Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 17) There are two ways in which the Fed can provide additional reserves to the banking system: it can ________ government bonds or it can ________ discount loans to commercial banks. A) sell; extend B) sell; call in C) purchase; extend D) purchase; call in Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 18) A decrease in ________ leads to an equal ________ in the monetary base in the short run. A) float; increase B) float; decrease C) Treasury deposits at the Fed; decrease D) discount loans; increase Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 11 Copyright © 2019 Pearson Education, Inc.

19) The monetary base declines when A) the Fed extends discount loans. B) Treasury deposits at the Fed decrease. C) float increases. D) the Fed sells securities. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 20) An increase in ________ leads to an equal ________ in the monetary base in the short run. A) float; decrease B) float; increase C) discount loans; decrease D) Treasury deposits at the Fed; increase Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 21) Suppose a person cashes his payroll check and holds all the funds in the form of currency. Everything else held constant, total reserves in the banking system ________ and the monetary base ________. A) remain unchanged; increases B) decrease; increases C) decrease; remains unchanged D) decrease; decreases Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 22) Suppose your payroll check is directly deposited to your checking account. Everything else held constant, total reserves in the banking system ________ and the monetary base ________. A) remain unchanged; remains unchanged B) remain unchanged; increases C) decrease; increases D) decrease; decreases Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 23) The Fed does not tightly control the monetary base because it does NOT completely control A) open market purchases. B) open market sales. C) borrowed reserves. D) the discount rate. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 12 Copyright © 2019 Pearson Education, Inc.

24) Subtracting borrowed reserves from the monetary base obtains A) reserves. B) high-powered money. C) the nonborrowed monetary base. D) the borrowed monetary base. Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 25) The relationship between borrowed reserves (BR), the nonborrowed monetary base (MBn), and the monetary base (MB) is A) MB = MBn - BR. B) BR = MBn - MB. C) BR = MB - MBn. D) MB = BR - MBn. Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 26) Explain two ways by which the Federal Reserve System can increase the monetary base. Why is the effect of Federal Reserve actions on bank reserves less exact than the effect on the monetary base? Answer: The Fed can increase the monetary base by purchasing government bonds and by extending discount loans. Because the Fed cannot control the distribution of the monetary base between reserves and currency, it has less control over reserves than the base. Ques Status: Previous Edition AACSB: Reflective Thinking

14.4 Multiple Deposit Creation: A Simple Model 1) When the Fed supplies the banking system with an extra dollar of reserves, deposits increase by more than one dollar—a process called A) extra deposit creation. B) multiple deposit creation. C) expansionary deposit creation. D) stimulative deposit creation. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 2) When the Fed supplies the banking system with an extra dollar of reserves, deposits ________ by ________ than one dollar—a process called multiple deposit creation. A) increase; less B) increase; more C) decrease; less D) decrease; more Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 3) If the required reserve ratio is equal to 10 percent, a single bank can increase its loans up to a maximum amount equal to A) its excess reserves. B) 10 times its excess reserves. C) 10 percent of its excess reserves. D) its total reserves. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 4) In the simple deposit expansion model, if the Fed purchases $100 worth of bonds from a bank that previously had no excess reserves, the bank can now increase its loans by A) $10. B) $100. C) $100 times the reciprocal of the required reserve ratio. D) $100 times the required reserve ratio. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking

5) In the simple deposit expansion model, if the Fed purchases $100 worth of bonds from a bank that previously had no excess reserves, deposits in the banking system can potentially increase by A) $10. B) $100. C) $100 times the reciprocal of the required reserve ratio. D) $100 times the required reserve ratio. Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 6) In the simple deposit expansion model, if the Fed extends a $100 discount loan to a bank that previously had no excess reserves, the bank can now increase its loans by A) $10. B) $100. C) $100 times the reciprocal of the required reserve ratio. D) $100 times the required reserve ratio. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 7) In the simple deposit expansion model, if the Fed extends a $100 discount loan to a bank that previously had no excess reserves, deposits in the banking system can potentially increase by A) $10. B) $100. C) $100 times the reciprocal of the required reserve ratio. D) $100 times the required reserve ratio. Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 8) In the simple model of multiple deposit creation in which banks do not hold excess reserves, the increase in checkable deposits equals the product of the change in reserves and the A) reciprocal of the excess reserve ratio. B) simple deposit expansion multiplier. C) reciprocal of the simple deposit multiplier. D) discount rate. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking

9) The simple deposit multiplier can be expressed as the ratio of the A) change in reserves in the banking system divided by the change in deposits. B) change in deposits divided by the change in reserves in the banking system. C) required reserve ratio divided by the change in reserves in the banking system. D) change in deposits divided by the required reserve ratio. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 10) If reserves in the banking system increase by $100, then checkable deposits will increase by $1,000 in the simple model of deposit creation when the required reserve ratio is A) 0.01. B) 0.10. C) 0.05. D) 0.20. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 11) If reserves in the banking system increase by $100, then checkable deposits will increase by $500 in the simple model of deposit creation when the required reserve ratio is A) 0.01. B) 0.10. C) 0.05. D) 0.20. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 12) If the required reserve ratio is 10 percent, the simple deposit multiplier is A) 5.0. B) 2.5. C) 100.0. D) 10.0. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 13) If the required reserve ratio is 15 percent, the simple deposit multiplier is A) 15.0. B) 1.5. C) 6.67. D) 3.33. Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 16 Copyright © 2019 Pearson Education, Inc.

14) If the required reserve ratio is 20 percent, the simple deposit multiplier is A) 5.0. B) 2.5. C) 4.0. D) 10.0. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 15) If the required reserve ratio is 25 percent, the simple deposit multiplier is A) 5.0. B) 2.5. C) 4.0. D) 10.0. Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 16) A simple deposit multiplier equal to one implies a required reserve ratio equal to A) 100 percent. B) 50 percent. C) 25 percent. D) 0 percent. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 17) A simple deposit multiplier equal to two implies a required reserve ratio equal to A) 100 percent. B) 50 percent. C) 25 percent. D) 0 percent. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 18) A simple deposit multiplier equal to four implies a required reserve ratio equal to A) 100 percent. B) 50 percent. C) 25 percent. D) 0 percent. Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking

19) In the simple deposit expansion model, if the banking system has excess reserves of $75, and the required reserve ratio is 20%, the potential expansion of checkable deposits is A) $75. B) $750. C) $37.50. D) $375. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 20) In the simple deposit expansion model, if the required reserve ratio is 20 percent and the Fed increases reserves by $100, checkable deposits can potentially expand by A) $100. B) $250. C) $500. D) $1,000. Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 21) In the simple deposit expansion model, if the required reserve ratio is 10 percent and the Fed increases reserves by $100, checkable deposits can potentially expand by A) $100. B) $250. C) $500. D) $1,000. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 22) In the simple deposit expansion model, an expansion in checkable deposits of $1,000 when the required reserve ratio is equal to 20 percent implies that the Fed A) sold $200 in government bonds. B) sold $500 in government bonds. C) purchased $200 in government bonds. D) purchased $500 in government bonds. Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking

23) In the simple deposit expansion model, an expansion in checkable deposits of $1,000 when the required reserve ratio is equal to 10 percent implies that the Fed A) sold $1,000 in government bonds. B) sold $100 in government bonds. C) purchased $1,000 in government bonds. D) purchased $100 in government bonds. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 24) In the simple deposit expansion model, a decline in checkable deposits of $1,000 when the required reserve ratio is equal to 20 percent implies that the Fed A) sold $200 in government bonds. B) sold $500 in government bonds. C) purchased $200 in government bonds. D) purchased $500 in government bonds. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 25) In the simple deposit expansion model, a decline in checkable deposits of $1,000 when the required reserve ratio is equal to 10 percent implies that the Fed A) sold $1,000 in government bonds. B) sold $100 in government bonds. C) purchased $1,000 in government bonds. D) purchased $100 in government bonds. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 26) In the simple deposit expansion model, a decline in checkable deposits of $500 when the required reserve ratio is equal to 10 percent implies that the Fed A) sold $500 in government bonds. B) sold $50 in government bonds. C) purchased $50 in government bonds. D) purchased $500 in government bonds. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking

27) In the simple deposit expansion model, a decline in checkable deposits of $500 when the required reserve ratio is equal to 20 percent implies that the Fed A) sold $250 in government bonds. B) sold $100 in government bonds. C) sold $50 in government bonds. D) purchased $100 in government bonds. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 28) If reserves in the banking system increase by $100, then checkable deposits will increase by $400 in the simple model of deposit creation when the required reserve ratio is A) 0.01. B) 0.10. C) 0.20. D) 0.25. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 29) If reserves in the banking system increase by $100, then checkable deposits will increase by $667 in the simple model of deposit creation when the required reserve ratio is A) 0.01. B) 0.05. C) 0.15. D) 0.20. Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 30) If reserves in the banking system increase by $100, then checkable deposits will increase by $100 in the simple model of deposit creation when the required reserve ratio is A) 0.01. B) 0.10. C) 0.20. D) 1.00. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking

31) If reserves in the banking system increase by $100, then checkable deposits will increase by $2,000 in the simple model of deposit creation when the required reserve ratio is A) 0.01. B) 0.05. C) 0.10. D) 0.20. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 32) If reserves in the banking system increase by $200, then checkable deposits will increase by $500 in the simple model of deposit creation when the required reserve ratio is A) 0.04. B) 0.25. C) 0.40. D) 0.50. Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 33) If a bank has excess reserves of $10,000 and demand deposit liabilities of $80,000, and if the reserve requirement is 20 percent, then the bank has actual reserves of A) $16,000. B) $20,000. C) $26,000. D) $36,000. Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 34) If a bank has excess reserves of $20,000 and demand deposit liabilities of $80,000, and if the reserve requirement is 20 percent, then the bank has total reserves of A) $16,000. B) $20,000. C) $26,000. D) $36,000. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking

35) If a bank has excess reserves of $5,000 and demand deposit liabilities of $80,000, and if the reserve requirement is 20 percent, then the bank has actual reserves of A) $11,000. B) $20,000. C) $21,000. D) $26,000. Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 36) If a bank has excess reserves of $15,000 and demand deposit liabilities of $80,000, and if the reserve requirement is 20 percent, then the bank has total reserves of A) $11,000. B) $21,000. C) $31,000. D) $41,000. Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 37) If a bank has excess reserves of $4,000 and demand deposit liabilities of $100,000, and if the reserve requirement is 15 percent, then the bank has actual reserves of A) $17,000. B) $19,000. C) $24,000. D) $29,000. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 38) If a bank has excess reserves of $4,000 and demand deposit liabilities of $100,000, and if the reserve requirement is 10 percent, then the bank has actual reserves of A) $14,000. B) $19,000. C) $24,000. D) $29,000. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking

39) If a bank has excess reserves of $7,000 and demand deposit liabilities of $100,000, and if the reserve requirement is 15 percent, then the bank has actual reserves of A) $17,000. B) $22,000. C) $27,000. D) $29,000. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 40) If a bank has excess reserves of $7,000 and demand deposit liabilities of $100,000, and if the reserve requirement is 10 percent, then the bank has actual reserves of A) $14,000. B) $17,000. C) $22,000. D) $27,000. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 41) A bank has excess reserves of $6,000 and demand deposit liabilities of $100,000 when the required reserve ratio is 20 percent. If the reserve ratio is raised to 25 percent, the bank's excess reserves will be A) -$5,000. B) -$1,000. C) $1,000. D) $5,000. Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 42) A bank has excess reserves of $4,000 and demand deposit liabilities of $100,000 when the required reserve ratio is 20 percent. If the reserve ratio is raised to 25 percent, the bank's excess reserves will be A) -$5,000. B) -$1,000. C) $1,000. D) $5,000. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking

43) A bank has excess reserves of $10,000 and demand deposit liabilities of $100,000 when the required reserve ratio is 20 percent. If the reserve ratio is raised to 25 percent, the bank's excess reserves will be A) -$5,000. B) -$1,000. C) $1,000. D) $5,000. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 44) A bank has no excess reserves and demand deposit liabilities of $100,000 when the required reserve ratio is 20 percent. If the reserve ratio is raised to 25 percent, the bank's excess reserves will now be A) -$5,000. B) -$1,000. C) $1,000. D) $5,000. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 45) A bank has excess reserves of $1,000 and demand deposit liabilities of $80,000 when the reserve requirement is 20 percent. If the reserve requirement is lowered to 10 percent, the bank's excess reserves will be A) $1,000. B) $8,000. C) $9,000. D) $17,000. Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 46) A bank has excess reserves of $1,000 and demand deposit liabilities of $80,000 when the reserve requirement is 25 percent. If the reserve requirement is lowered to 20 percent, the bank's excess reserves will be A) $1,000. B) $5,000. C) $8,000. D) $9,000. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking

47) Decisions by depositors to increase their holdings of ________, or of banks to hold ________ will result in a smaller expansion of deposits than the simple model predicts. A) deposits; required reserves B) deposits; excess reserves C) currency; required reserves D) currency; excess reserves Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 48) Decisions by depositors to increase their holdings of ________, or of banks to hold excess reserves will result in a ________ expansion of deposits than the simple model predicts. A) deposits; smaller B) deposits; larger C) currency; smaller D) currency; larger Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 49) Decisions by ________ about their holdings of currency and by ________ about their holdings of excess reserves affect the money supply. A) borrowers; depositors B) banks; depositors C) depositors; borrowers D) depositors; banks Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 50) Assume that no banks hold excess reserves, and the public holds no currency. If a bank sells a $100 security to the Fed, explain what happens to this bank and two additional steps in the deposit expansion process, assuming a 10% reserve requirement. How much do deposits and loans increase for the banking system when the process is completed? Answer: Bank A first changes a security for reserves, and then lends the reserves, creating loans. It receives $100 in reserves from the sale of securities. Since all of these reserve will be excess reserves (there was no change in checkable deposits), the bank will loan out all $100. The $100 will then be deposited into Bank B. This bank now has a change in reserves of $100, of which $90 is excess reserves. Bank B will loan out this $90, which will be deposited into Bank C. Bank C now has an increase in reserves of $90, $81 of which is excess reserves. Bank C will loan out this $81 dollars and the process will continue until there are no more excess reserves in the banking system. For the banking system, both loans and deposits increase by $1,000. Ques Status: Previous Edition AACSB: Analytical Thinking 25 Copyright © 2019 Pearson Education, Inc.

51) Explain two reasons why the Fed does not have complete control over the level of bank deposits and loans. Explain how a change in either factor affects the deposit expansion process. Answer: The Fed does not completely control the level of bank deposits and loans because banks can hold excess reserves and the public can change its currency holdings. A change in either factor changes the deposit expansion process. An increase in either excess reserves or currency reduces the amount by which deposits and loans are increased. Ques Status: Previous Edition AACSB: Analytical Thinking 52) Explain why the simple deposit multiplier overstates the true deposit multiplier. Answer: The simple model ignores the role banks and their customers play in the creation process. The bank's customers can decide to hold currency and the bank can decide to hold excess reserves. Both of these will restrict the banking system's ability to create deposits. Thus, the true multiplier is less than the prediction of the simple deposit multiplier. Ques Status: Previous Edition AACSB: Analytical Thinking 14.5 Factors That Determine the Money Supply 1) An increase in the nonborrowed monetary base, everything else held constant, will cause A) the money supply to fall. B) the money supply to rise. C) no change in the money supply. D) demand deposits to fall. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 2) The money supply is ________ related to the nonborrowed monetary base, and ________ related to the level of borrowed reserves. A) positively; negatively B) negatively; not C) positively; positively D) negatively; negatively Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 3) The amount of borrowed reserves is ________ related to the discount rate, and is ________ related to the market interest rate. A) negatively; negatively B) negatively; positively C) positively; negatively D) positively; positively Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 26 Copyright © 2019 Pearson Education, Inc.

4) A ________ in market interest rates relative to the discount rate will cause discount borrowing to ________. A) fall; increase B) rise; decrease C) rise; increase D) fall; remain unchanged Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 5) Everything else held constant, an increase in currency holdings will cause A) the money supply to rise. B) the money supply to remain constant. C) the money supply to fall. D) checkable deposits to rise. Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 6) Everything else held constant, a decrease in holdings of excess reserves will mean A) a decrease in the money supply. B) an increase in the money supply. C) a decrease in checkable deposits. D) an increase in discount loans. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking

14.6 Overview of the Money Supply Process 1) In the model of the money supply process, the Federal Reserve's role in influencing the money supply is represented by A) both the required reserve ratio and the market interest rate. B) the required reserve ratio, nonborrowed reserves, and borrowed reserves. C) only borrowed reserves. D) only nonborrowed reserves. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 2) In the model of the money supply process, the depositor's role in influencing the money supply is represented by A) the currency holdings. B) the currency holdings and excess reserve. C) the currency holdings and borrowed reserve. D) the market interest rate. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 3) In the model of the money supply process, the bank's role in influencing the money supply process is represented by A) the excess reserve. B) both the excess reserve and the market interest rate. C) the currency ratio. D) only borrowed reserves. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking

14.7 The Money Multiplier 1) Models describing the determination of the money supply and the Fed's role in this process normally focus on ________ rather than ________, since Fed actions have a more predictable effect on the former. A) reserves; the monetary base B) reserves; high-powered money C) the monetary base; high-powered money D) the monetary base; reserves Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 2) The Fed can exert more precise control over ________ than it can over ________. A) high-powered money; reserves B) high-powered money; the monetary base C) the monetary base; high-powered money D) reserves; high-powered money Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 3) The ratio that relates the change in the money supply to a given change in the monetary base is called the A) money multiplier. B) required reserve ratio. C) deposit ratio. D) discount rate. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 4) An assumption in the model of the money supply process is that the desired levels of currency and excess reserves A) are given as constants. B) grow proportionally with checkable deposits. C) grow proportionally with high-powered money. D) grow proportionally over time. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking

5) The total amount of reserves in the banking system is equal to the ________ required reserves and excess reserves. A) sum of B) difference between C) product of D) ratio between Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 6) The total amount of required reserves in the banking system is equal to the ________ the required reserve ratio and checkable deposits. A) sum of B) difference between C) product of D) ratio between Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 7) Since the Federal Reserve sets the required reserve ratio to less than one, one dollar of reserves can support ________ of checkable deposits. A) exactly one dollar B) less than one dollar C) more than one dollar D) exactly twice the amount Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 8) An increase in the monetary base that goes into ________ is not multiplied, while an increase that goes into ________ is multiplied. A) deposits; currency B) excess reserves; currency C) currency; excess reserves D) currency; deposits Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking

9) An increase in the monetary base that goes into currency is ________, while an increase that goes into deposits is ________. A) multiplied; multiplied B) not multiplied; multiplied C) multiplied; not multiplied D) not multiplied; not multiplied Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 10) If the Fed injects reserves into the banking system and they are held as excess reserves, then the money supply A) increases by only the initial increase in reserves. B) increases by only one-half the initial increase in reserves. C) increases by a multiple of the initial increase in reserves. D) does not change. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 11) If the Fed injects reserves into the banking system and they are held as excess reserves, then the monetary base ________ and the money supply ________. A) remains unchanged; remains unchanged B) remains unchanged; increases C) increases; increases D) increases; remains unchanged Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 12) If the required reserve ratio is 10 percent, currency in circulation is $400 billion, checkable deposits are $800 billion, and excess reserves total $0.8 billion, then the money supply is ________ billion. A) $8,000 B) $1,200 C) $1,200.80 D) $8,400 Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking

13) If the required reserve ratio is 10 percent, currency in circulation is $400 billion, checkable deposits are $800 billion, and excess reserves total $0.8 billion, then the M1 money multiplier is A) 2.5. B) 1.67. C) 2.0. D) 0.601. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 14) If the required reserve ratio is 10 percent, currency in circulation is $1,200 billion, checkable deposits are $1,600 billion, and excess reserves total $2,500 billion, then the M1 money multiplier is A) 2.5. B) 1.7. C) 7.3. D) 0.73. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 15) If the required reserve ratio is 10 percent, currency in circulation is $400 billion, checkable deposits are $800 billion, and excess reserves total $0.8 billion, then the currency-deposit ratio is A) 0.25. B) 0.50. C) 0.40. D) 0.05. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 16) If the required reserve ratio is 10 percent, currency in circulation is $400 billion, checkable deposits are $800 billion, and excess reserves total $0.8 billion, then the excess reservescheckable deposit ratio is A) 0.001. B) 0.10. C) 0.01. D) 0.05. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking

17) If the required reserve ratio is 10 percent, currency in circulation is $1,200 billion, checkable deposits are $1,600 billion, and excess reserves total $2,500 billion, then the excess reservescheckable deposit ratio is A) 1.56. B) 0.48. C) 0.72. D) 0.56. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 18) If the required reserve ratio is 10 percent, currency in circulation is $400 billion, checkable deposits are $800 billion, and excess reserves total $0.8 billion, then the monetary base is A) $480 billion. B) $480.8 billion. C) $80 billion. D) $80.8 billion. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 19) If the required reserve ratio is 15 percent, currency in circulation is $400 billion, checkable deposits are $800 billion, and excess reserves total $0.8 billion, then the M1 money multiplier is A) 2.5. B) 1.67. C) 2.3. D) 0.651. Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 20) If the required reserve ratio is 5 percent, currency in circulation is $400 billion, checkable deposits are $800 billion, and excess reserves total $0.8 billion, then the M1 money multiplier is A) 2.5. B) 2.72. C) 2.3. D) 0.551. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking

21) If the required reserve ratio is 10 percent, currency in circulation is $400 billion, checkable deposits are $1,000 billion, and excess reserves total $1 billion, then the money supply is ________ billion. A) $10,000 B) $4,000 C) $1,400 D) $10,400 Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 22) If the required reserve ratio is 10 percent, currency in circulation is $400 billion, checkable deposits are $1,000 billion, and excess reserves total $1 billion, then the M1 money multiplier is A) 2.5. B) 2.8. C) 2.0. D) 0.7. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 23) If the required reserve ratio is 10 percent, currency in circulation is $400 billion, checkable deposits are $1,000 billion, and excess reserves total $1 billion, then the currency-deposit ratio is A) 0.25. B) 0.50. C) 0.40. D) 0.05. Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 24) If the required reserve ratio is 10 percent, currency in circulation is $400 billion, checkable deposits are $1,000 billion, and excess reserves total $1 billion, then the excess reservescheckable deposit ratio is A) 0.01. B) 0.10. C) 0.001. D) 0.05. Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking

25) If the required reserve ratio is 10 percent, currency in circulation is $400 billion, checkable deposits are $1,000 billion, and excess reserves total $1 billion, then the monetary base is A) $400 billion. B) $401 billion. C) $500 billion. D) $501 billion. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 26) If the required reserve ratio is 15 percent, currency in circulation is $400 billion, checkable deposits are $1,000 billion, and excess reserves total $1 billion, then the M1 money multiplier is A) 2.54. B) 2.67. C) 2.35. D) 0.551. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 27) If the required reserve ratio is one-third, currency in circulation is $300 billion, and checkable deposits are $900 billion, then the money supply is ________ billion. A) $2,700 B) $3,000 C) $1,200 D) $1,800 Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 28) If the required reserve ratio is one-third, currency in circulation is $300 billion, checkable deposits are $900 billion, and there is no excess reserve, then the M1 money multiplier is A) 2.5. B) 2.8. C) 2.0. D) 0.67. Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking

29) If the required reserve ratio is one-third, currency in circulation is $300 billion, and checkable deposits are $900 billion, then the currency-deposit ratio is A) 0.25. B) 0.33. C) 0.67. D) 0.375. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 30) If the required reserve ratio is one-third, currency in circulation is $300 billion, checkable deposits are $900 billion, and there is no excess reserve, then the monetary base is A) $300 billion. B) $600 billion. C) $333 billion. D) $667 billion. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 31) Everything else held constant, an increase in the required reserve ratio on checkable deposits will cause A) the money supply to rise. B) the money supply to remain constant. C) the money supply to fall. D) checkable deposits to rise. Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 32) Everything else held constant, a decrease in the required reserve ratio on checkable deposits will mean A) a decrease in the money supply. B) an increase in the money supply. C) a decrease in checkable deposits. D) an increase in discount loans. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking

33) Everything else held constant, an increase in the required reserve ratio on checkable deposits causes the M1 money multiplier to ________ and the money supply to ________. A) decrease; increase B) increase; increase C) decrease; decrease D) increase; decrease Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 34) Everything else held constant, a decrease in the required reserve ratio on checkable deposits causes the M1 money multiplier to ________ and the money supply to ________. A) decrease; increase B) increase; increase C) decrease; decrease D) increase; decrease Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 35) Assuming initially that the required reserve ratio = 10%, the currency-deposit ratio = 40%, and the excess reserve ratio = 0, an increase in the required reserve ratio to 15% causes the M1 money multiplier to ________, everything else held constant. A) increase from 2.55 to 2.8 B) decrease from 2.8 to 2.55 C) increase from 1.82 to 2 D) decrease from 2 to 1.82 Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 36) Assuming initially that the required reserve ratio = 10%, the currency-deposit ratio = 40%, and the excess reserve ratio = 0, a decrease in the required reserve ratio to 5% causes the M1 money multiplier to ________, everything else held constant. A) increase from 2.8 to 3.11 B) decrease from 3.11 to 2.8 C) increase from 2 to 2.22 D) decrease from 2.22 to 2 Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking

37) Everything else held constant, if the sum of the required reserve ratio and the excess reserve ratio is less than one, an increase in the currency-checkable deposit ratio will mean A) an increase in currency in circulation and an increase in the money supply. B) an increase in money supply but no change in reserves. C) a decrease in the money supply. D) an increase in currency in circulation but no change in the money supply. Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 38) Everything else held constant, if the sum of the required reserve ratio and the excess reserve ratio is less than one, a decrease in the currency-checkable deposit ratio will mean A) an increase in currency in circulation and an increase in the money supply. B) an increase in money supply. C) a decrease in the money supply. D) an increase in currency in circulation but no change in the money supply. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 39) Everything else held constant, if the sum of the required reserve ratio and the excess reserve ratio is less than one, an increase in the currency-deposit ratio causes the M1 money multiplier to ________ and the money supply to ________. A) decrease; increase B) increase; decrease C) decrease; decrease D) increase; increase Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 40) Everything else held constant, if the sum of the required reserve ratio and the excess reserve ratio is less than one, a decrease in the currency-deposit ratio causes the M1 money multiplier to ________ and the money supply to ________. A) decrease; increase B) increase; increase C) decrease; decrease D) increase; decrease Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking

41) Everything else held constant, if the sum of the required reserve ratio and the excess reserve ratio is greater than one, an increase in the currency-deposit ratio causes the M1 money multiplier to ________ and the money supply to ________. A) decrease; increase B) increase; increase C) decrease; decrease D) increase; decrease Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 42) Assuming initially that the required reserve ratio = 10%, the currency-deposit ratio = 40%, and the excess reserve ratio = 0, an increase in the currency-deposit ratio to 50% causes the M1 money multiplier to ________, everything else held constant. A) increase from 2.5 to 2.8 B) decrease from 2.8 to 2.5 C) increase from 2.33 to 2.8 D) decrease from 2.8 to 2.33 Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 43) Assuming initially that the required reserve ratio = 10%, the currency-deposit ratio = 40%, and the excess reserve ratio = 0, an decrease in the currency-deposit ratio to 30% causes the M1 money multiplier to ________, everything else held constant. A) increase from 2.8 to 3.25 B) decrease from 3.25 to 2.8 C) increase from 2.8 to 3.5 D) decrease from 3.5 to 2.8 Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 44) Everything else held constant, a decrease in the excess reserves ratio causes the M1 money multiplier to ________ and the money supply to ________. A) decrease; increase B) increase; increase C) decrease; decrease D) increase; decrease Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking

45) Everything else held constant, an increase in the excess reserves ratio causes the M1 money multiplier to ________ and the money supply to ________. A) decrease; increase B) increase; increase C) decrease; decrease D) increase; decrease Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 46) Assuming initially that the required reserve ratio = 15%, the currency-deposit ratio = 40%, and the excess reserve ratio = 5%, a decrease in the excess reserve ratio to 0% causes the M1 money multiplier to ________, everything else held constant. A) increase from 2.33 to 2.55 B) decrease from 2.55 to 2.33 C) increase from 1.67 to 1.82 D) decrease from 1.82 to 1.67 Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 47) Assuming initially that the required reserve ratio = 15%, the currency-deposit ratio = 40%, and the excess reserve ratio = 5%, an increase in the excess reserve ratio to 10% causes the M1 money multiplier to ________, everything else held constant. A) increase from 2.15 to 2.33 B) decrease from 2.33 to 2.15 C) increase from 1.54 to 1.67 D) decrease from 1.67 to 1.54 Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 48) Assuming initially that the required reserve ratio = 10%, the currency-deposit ratio = 75%, and the excess reserve ratio = 156%, an increase in the excess reserve ratio to 200% causes the M1 money multiplier to ________, everything else held constant. A) increase from 0.15 to 0.33 B) decrease from 0.73 to 0.61 C) increase from 0.54 to 0.67 D) decrease from 1.67 to 1.54 Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking

49) Assuming initially that the required reserve ratio = 10%, the currency-deposit ratio = 75%, and the excess reserve ratio = 156%, an increase in the required reserve ratio to 15% causes the M1 money multiplier to ________, everything else held constant. A) increase from 0.15 to 0.33 B) increase from 0.54 to 0.67 C) decrease from 0.73 to 0.71 D) decrease from 1.67 to 1.54 Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 50) Assuming initially that the required reserve ratio = 10%, the currency-deposit ratio = 75%, and the excess reserve ratio = 156%, an increase in the currency-deposit ratio to 150% causes the M1 money multiplier to ________, everything else held constant. A) increase from 0.73 to 0.78 B) decrease from 0.73 to 0.61 C) increase from 1.54 to 1.67 D) decrease from 1.67 to 1.54 Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 51) The excess reserves ratio is ________ related to expected deposit outflows, and is ________ related to the market interest rate. A) negatively; negatively B) negatively; positively C) positively; negatively D) positively; positively Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 52) The money supply is ________ related to expected deposit outflows, and is ________ related to the market interest rate. A) negatively; negatively B) negatively; positively C) positively; negatively D) positively; positively Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking

53) The money multiplier is A) negatively related to high-powered money. B) positively related to the excess reserves ratio. C) negatively related to the required reserve ratio. D) positively related to holdings of excess reserves. Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 54) From the start of the global financial crisis in 2007 to date, the currency ratio A) increased sharply. B) decreased sharply. C) increased slightly. D) decreased slightly. Answer: D Ques Status: Revised AACSB: Reflective Thinking 55) From the start of the global financial crisis in 2007 to date, the excess reserve ratio A) increased sharply. B) decreased sharply. C) increased slightly. D) decreased slightly. Answer: A Ques Status: Revised AACSB: Reflective Thinking 56) Explain the complete formula for the M1 money supply, and explain how changes in required reserves, excess reserves, the currency ratio, the nonborrowed base, and borrowed reserves affect the money supply. Answer: The formula is M = × (MBn + BR). The formula indicates that the money supply is the product of the multiplier times the base. Increases in any of the multiplier components, required reserves, r; excess reserves, e; or the currency ratio, c; reduce the multiplier and the money supply. Increases in the nonborrowed base and borrowed reserves both increase the base and the money supply. Ques Status: Previous Edition AACSB: Reflective Thinking

14.8 Web Appendix 1: The Fed's Balance Sheet and the Monetary Base 1) Which is the most important category of Fed assets? A) securities B) discount loans C) gold and SDR certificates D) cash items in the process of collection Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 2) The two most important categories of assets on the Fed's balance sheet are ________ and ________ because they earn interest. A) discount loans; coins B) securities; discount loans C) gold; coins D) cash items in the process of collection; SDR certificate accounts Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 3) The Fed's holdings of securities consist primarily of ________, but also in the past have included ________. A) Treasury securities; bankers' acceptances B) municipal securities; bankers' acceptances C) bankers' acceptances; Treasury securities D) Treasury securities; municipal securities Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 4) The volume of loans that the Fed makes to banks is affected by the Fed's setting of the interest rate on these loans, called the A) federal funds rate. B) prime rate. C) discount rate. D) interbank rate. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking

5) Special Drawing Rights (SDRs) are issued to governments by the ________ to settle international debts and have replaced ________ in international transactions. A) Federal Reserve System; gold B) Federal Reserve System; dollars C) International Monetary Fund; gold D) International Monetary Fund; dollars Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 6) When the Treasury acquires gold or SDRs, it issues certificates to the ________, which are a claim on the gold or SDRs, and in turn is credited with deposit balances at the ________. A) Federal Reserve System; Fed B) Federal Reserve System; IMF C) International Monetary Fund; Fed D) International Monetary Fund; IMF Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 7) Which of the following are NOT assets on the Fed's balance sheet? A) discount loans B) U.S. Treasury deposits C) cash items in the process of collection D) U.S. Treasury bills Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 8) Which of the following are NOT assets on the Fed's balance sheet? A) securities B) discount loans C) cash items in the process of collection D) deferred availability cash items Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 9) Which of the following are NOT liabilities on the Fed's balance sheet? A) discount loans B) bank deposits C) deferred availability cash items D) U.S. Treasury deposits Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 44 Copyright © 2019 Pearson Education, Inc.

10) When the Fed purchases artwork to decorate the conference room at the Federal Reserve Bank of Kansas City A) reserves rise, but the monetary base falls. B) reserves fall. C) currency in circulation falls. D) the monetary base rises. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 11) A Fed purchase of gold, SDRs, a deposit denominated in a foreign currency or any other asset is just an open market ________ of these assets, ________ the monetary base. A) purchase; raising B) sale; raising C) purchase; lowering D) sale; lowering Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 12) An increase in Treasury deposits at the Fed causes A) the monetary base to increase. B) the monetary base to decrease. C) Fed assets to increase but has no effect on the monetary base. D) Fed assets to decrease but has no effect on the monetary base. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 13) An increase in U.S. Treasury deposits at the Fed reduces both ________ and the ________. A) reserves; monetary base B) Fed liabilities; money multiplier C) Fed assets; monetary base D) Fed assets; money multiplier Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 14) U.S. Treasury deposits at the Fed are ________ for the Fed but ________ for the Treasury. Thus an increase in U.S. Treasury deposits ________ the monetary base. A) a liability; an asset; increases B) a liability; an asset; decreases C) an asset; a liability; increases D) an asset; a liability; decreases Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 45 Copyright © 2019 Pearson Education, Inc.

15) An increase in which of the following leads to a decline in the monetary base? A) float B) discount loans C) foreign deposits at the Fed D) SDRs Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 16) Suppose, while cleaning out its closets, a worker at the Federal Reserve bank branch in Memphis discovers a painting of Elvis (medium: acrylic on velvet) that used to grace the walls of the conference room. Suppose further that, at a public auction, the bank sells the painting for $19.95. This sale will cause ________ in the monetary base, everything else held constant. A) an increase of $19.95 B) an increase of more than $19.95 C) a decrease of $19.95 D) a decrease of more than $19.95 Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 17) Suppose the Bank of China permanently decreases its purchases of U.S. government bonds and, instead, holds more dollars on deposit at the Federal Reserve. Everything else held constant, a open market ________ would be the appropriate monetary policy action for the Fed to take to offset the expected ________ in the monetary base in the United States. A) purchase; decrease B) purchase; increase C) sale; decrease D) sale; increase Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking

14.9 Web Appendix 2: The M2 Money Multiplier 1) The equation that represents M2 in the model of the money supply process is A) M2 = C + D. B) M2 = C + D + T - MMF. C) M2 = C + D - T + MMF. D) M2 = C + D + T + MMF. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 2) In the model of the money supply process for M2, the relationship between checkable deposits and the M2 money supply is represented by A) D = × M2. B) D = (1 + c + t + mm) × M2. C) M2 = × D. D) M2 =

Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 3) The M2 money supply is represented by A) M2 = × MB. B) M2 =

C) MB =

× M2.

D) MB =

Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 4) The M2 money multiplier is A) negatively related to high-powered money. B) positively related to the time deposit ratio. C) positively related to the required reserve ratio. D) positively related to the excess reserves ratio. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking

5) Everything else held constant, an increase in the currency ratio will mean ________ in the M2 money multiplier and ________ in the M2 money supply. A) an increase; an increase B) an increase; a decrease C) a decrease; an increase D) a decrease; a decrease Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 6) Everything else held constant, a decrease in the currency ratio will mean ________ in the M1 money multiplier and ________ in the M2 money multiplier. A) an increase; an increase B) an increase; a decrease C) a decrease; an increase D) a decrease; a decrease Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 7) Everything else held constant, an increase in the required reserve ratio will mean ________ in the M2 money multiplier and ________ in the M2 money supply. A) an increase; an increase B) an increase; a decrease C) a decrease; an increase D) a decrease; a decrease Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 8) Everything else held constant, an increase in the required reserve ratio will result in ________ in M1 and ________ in M2. A) an increase; an increase B) an increase; a decrease C) a decrease; an increase D) a decrease; a decrease Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking

9) Everything else held constant, an increase in the time deposit ratio will mean ________ in the M2 money multiplier and ________ in the M2 money supply. A) an increase; an increase B) an increase; a decrease C) a decrease; an increase D) a decrease; a decrease Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 10) Everything else held constant, an increase in the time deposit ratio will result in ________ in the M1 money multiplier and ________ in the M2 money multiplier. A) an increase; an increase B) no change; an increase C) a decrease; a decrease D) no change; a decrease Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 11) Everything else held constant, an increase in the money market fund ratio will mean ________ in the M2 money multiplier and ________ in the M2 money supply. A) an increase; an increase B) an increase; a decrease C) a decrease; an increase D) a decrease; a decrease Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 12) Everything else held constant, an increase in the money market fund ratio will result in ________ in the M1 money multiplier and ________ in the M2 money multiplier. A) an increase; an increase B) no change; an increase C) a decrease; a decrease D) no change; a decrease Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking

13) Everything else held constant, an increase in the excess reserve ratio will mean ________ in the M2 money multiplier and ________ in the M2 money supply. A) an increase; an increase B) an increase; a decrease C) a decrease; an increase D) a decrease; a decrease Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 14) Everything else held constant, an increase in the excess reserve ratio will mean ________ in the M1 money multiplier and ________ in the M2 money multiplier. A) an increase; an increase B) no change; an increase C) a decrease; a decrease D) no change; a decrease Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 14.10 Web Appendix 3: Explaining the Behavior of the Currency Ratio 1) Factors causing an increase in currency holdings include A) an increase in the interest rates paid on checkable deposits. B) an increase in the cost of acquiring currency. C) a decrease in bank panics. D) an increase in illegal activity. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 2) Part of the increase in currency holdings in the 1960s and 1970s can be attributed to A) increases in income tax rates. B) the switch from progressive to proportional income taxes. C) the adoption of regressive taxes. D) bracket creep due to inflation and progressive income taxes. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking

3) Everything else held constant, an increase in wealth will cause the holdings of checkable deposits to the holdings of currency to ________ and the currency ratio will ________. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 4) Everything else held constant, an increase in the interest rate paid on checkable deposits will cause ________ in the amount of checkable deposits held relative to currency holdings and ________ in the currency ratio. A) an increase; an increase B) an increase; a decrease C) a decrease; an increase D) a decrease; a decrease Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 5) The increase in the availability of ATMs has caused the cost of acquiring currency to ________ which will cause the currency ratio to ________, everything else held constant. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 6) The steepest increase in the currency ratio since 1892 occurred during A) World War II. B) the Great Depression. C) the interwar years. D) the past twenty years. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking

7) The factor accounting for the steepest rise in the currency ratio since 1892 is A) taxes. B) bank panics. C) illegal activity. D) an increase in wealth. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 8) The increase in the currency ratio during World War II was due to A) bank panics. B) a drop in the rate of interest paid on checking deposits. C) the spread of ATMs. D) high taxes and illegal activities. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 9) The upward trend in the currency-deposit ratio during 1994-2007 can be explained by A) the increased holdings of U.S. currency by foreigners. B) bank panics. C) a drop in the rate of interest paid on checking deposits. D) high taxes and illegal activities. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 10) The declining trend in the currency-deposit ratio during 2007-2014 can be explained by A) the increased holdings of U.S. currency by foreigners. B) bank panics. C) a drop in the rate of interest paid on checking deposits. D) the increasing use of debit cards. Answer: D Ques Status: Previous Edition AACSB: Application of Knowledge

14.11 Web Appendix 4: The Great Depression Bank Panics, 1930–1933, and the Money Supply 1) During the bank panics of the Great Depression the currency ratio A) increased sharply. B) decreased sharply. C) increased slightly. D) decreased slightly. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 2) During the bank panics of the Great Depression the excess reserve ratio A) increased sharply. B) decreased sharply. C) increased slightly. D) decreased slightly. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 3) In the early 1930s, the currency-deposit ratio rose, as did the level of excess reserves. Money supply analysis predicts that, everything else held constant, the money supply should have A) risen. B) fallen. C) remain unchanged. D) either risen, fallen, or remain unchanged. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 4) The monetary base increased by 20% during the contraction of 1929-1933, but the money supply fell by 25%. Explain why this occurred. How can the money supply fall when the base increases? Answer: The banking crisis caused the public to fear for the safety of their deposits, increasing both the currency ratio and bank holdings of excess reserves in anticipation of deposit outflows. Both of these changes reduce the money multiplier and the money supply. In this case, the fall in the multiplier due to increases of currency and excess reserves more than offset the increase in the base, causing the money supply to fall. Ques Status: Previous Edition AACSB: Analytical Thinking

Economics of Money, Banking, and Financial Markets, 12e (Mishkin) Chapter 15 Tools of Monetary Policy 15.1 The Market for Reserves and the Federal Funds Rate 1) The interest rate charged on overnight loans of reserves between banks is the A) prime rate. B) discount rate. C) federal funds rate. D) Treasury bill rate. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 2) The primary indicator of the Fed's stance on monetary policy is A) the discount rate. B) the federal funds rate. C) the growth rate of the monetary base. D) the growth rate of M2. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 3) The quantity of reserves demanded equals A) required reserves plus borrowed reserves. B) excess reserves plus borrowed reserves. C) required reserves plus excess reserves. D) total reserves minus excess reserves. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 4) Everything else held constant, when the federal funds rate is ________ the interest rate paid on reserves, the quantity of reserves demanded rises when the federal funds rate ________. A) above; rises B) above; falls C) below; rises D) below; falls Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking

5) The opportunity cost of holding excess reserves is the federal funds rate A) minus the discount rate. B) plus the discount rate. C) plus the interest rate paid on excess reserves. D) minus the interest rate paid on excess reserves. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 6) In the market for reserves, when the federal funds rate is above the interest rate paid on excess reserves, the demand curve for reserves is A) vertical. B) horizontal. C) positively sloped. D) negatively sloped. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 7) When the federal funds rate equals the interest rate paid on excess reserves A) the supply curve of reserves is vertical. B) the supply curve of reserves is horizontal. C) the demand curve for reserves is vertical. D) the demand curve for reserves is horizontal. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 8) The quantity of reserves supplied equals A) nonborrowed reserves minus borrowed reserves. B) nonborrowed reserves plus borrowed reserves. C) required reserves plus borrowed reserves. D) total reserves minus required reserves. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 9) In the market for reserves, when the federal funds interest rate is below the discount rate, the supply curve of reserves is A) vertical. B) horizontal. C) positively sloped. D) negatively sloped. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 2 Copyright © 2019 Pearson Education, Inc.

10) When the federal funds rate equals the discount rate A) the supply curve of reserves is vertical. B) the supply curve of reserves is horizontal. C) the demand curve for reserves is vertical. D) the demand curve for reserves is horizontal. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 11) In the market for reserves, if the federal funds rate is above the interest rate paid on excess reserves, then an open market ________ the supply of reserves, raising the federal funds interest rate, everything else held constant. A) sale decreases B) sale increases C) purchase increases D) purchase decreases Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 12) In the market for reserves, if the federal funds rate is above the interest rate paid on excess reserves, an open market purchase ________ the ________ of reserves which causes the federal funds rate to fall, everything else held constant. A) increases; supply B) increases; demand C) decreases; supply D) decreases; demand Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 13) In the market for reserves, if the federal funds rate is above the interest rate paid on excess reserves, an open market purchase ________ the supply of reserves and causes the federal funds interest rate to ________, everything else held constant. A) decreases; fall B) increases; fall C) increases; rise D) decreases; rise Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking

14) In the market for reserves, if the federal funds rate is above the interest rate paid on excess reserves, an open market sale ________ the supply of reserves causing the federal funds rate to ________, everything else held constant. A) decreases; decrease B) increases; decrease C) increases; increase D) decreases; increase Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 15) In the market for reserves, if the federal funds rate is above the interest rate paid on excess reserves, an open market sale ________ the ________ of reserves, causing the federal funds rate to increase, everything else held constant. A) increases; supply B) increases; demand C) decreases; supply D) decreases; demand Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 16) In the market for reserves, a lower discount rate A) decreases the supply of reserves. B) increases the supply of reserves. C) lengthens the vertical section of the supply curve of reserves. D) shortens the vertical section of the supply curve of reserves. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 17) In the market for reserves, a lower interest rate paid on excess reserves A) decreases the supply of reserves. B) increases the supply of reserves. C) decreases the effective floor for the federal funds rate. D) increases the effective floor for the federal funds rate. Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking

18) Everything else held constant, in the market for reserves, when the federal funds rate is 3%, lowering the discount rate from 5% to 4% A) lowers the federal funds rate. B) raises the federal funds rate. C) has no effect on the federal funds rate. D) has an indeterminate effect on the federal funds rate. Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 19) Everything else held constant, in the market for reserves, when the federal funds rate is 3%, increasing the interest rate paid on excess reserves from 1% to 2% A) lowers the federal funds rate. B) raises the federal funds rate. C) has no effect on the federal funds rate. D) has an indeterminate effect on the federal funds rate. Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 20) Everything else held constant, in the market for reserves, when the federal funds rate is 5%, lowering the discount rate from 5% to 4% A) lowers the federal funds rate. B) raises the federal funds rate. C) has no effect on the federal funds rate. D) has an indeterminate effect on the federal funds rate. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 21) Everything else held constant, in the market for reserves, when the federal funds rate is 1%, increasing the interest rate paid on excess reserves from 1% to 2% A) lowers the federal funds rate. B) raises the federal funds rate. C) has no effect on the federal funds rate. D) has an indeterminate effect on the federal funds rate. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking

22) Everything else held constant, in the market for reserves, when the federal funds rate is 3%, raising the discount rate from 5% to 6% A) lowers the federal funds rate. B) raises the federal funds rate. C) has no effect on the federal funds rate. D) has an indeterminate effect on the federal funds rate. Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 23) Everything else held constant, in the market for reserves, when the federal funds rate is 3%, lowering the interest rate paid on excess reserves rate from 2% to 1% A) lowers the federal funds rate. B) raises the federal funds rate. C) has no effect on the federal funds rate. D) has an indeterminate effect on the federal funds rate. Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 24) Everything else held constant, in the market for reserves, when the federal funds rate equals the discount rate, lowering the discount rate A) increases the federal funds rate. B) lowers the federal funds rate. C) has no effect on the federal funds rate. D) has an indeterminate effect of the federal funds rate. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 25) Everything else held constant, in the market for reserves, when the federal funds rate equals the interest rate paid on excess reserves, raising the interest rate paid on excess reserves A) increases the federal funds rate. B) lowers the federal funds rate. C) has no effect on the federal funds rate. D) has an indeterminate effect of the federal funds rate. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking

26) Everything else held constant, in the market for reserves, when the demand for federal funds intersects the reserve supply curve along the horizontal section, increasing the discount rate A) increases the federal funds rate. B) lowers the federal funds rate. C) has no effect on the federal funds rate. D) has an indeterminate effect on the federal funds rate. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 27) Everything else held constant, in the market for reserves, when the supply for federal funds intersects the reserve demand curve along the horizontal section of the demand curve, lowering the interest rate paid on excess reserves A) increases the federal funds rate. B) lowers the federal funds rate. C) has no effect on the federal funds rate. D) has an indeterminate effect of the federal funds rate. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 28) Everything else held constant, in the market for reserves, when the demand for federal funds intersects the reserve supply curve on the vertical section, increasing the discount rate A) increases the federal funds rate. B) lowers the federal funds rate. C) has no effect on the federal funds rate. D) has an indeterminate effect on the federal funds rate. Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 29) Everything else held constant, in the market for reserves, when the supply for federal funds intersects the reserve demand curve on the downward sloping section, decreasing the interest rate paid on excess reserves A) increases the federal funds rate. B) lowers the federal funds rate. C) has no effect on the federal funds rate. D) has an indeterminate effect on the federal funds rate. Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking

30) Everything else held constant, in the market for reserves, increases in the discount rate affect the federal funds rate A) when the funds rate is below the discount rate. B) when the funds rate equals the discount rate. C) when the demand for federal funds intersects the vertical section of the reserve supply curve. D) when the demand for federal funds equals zero. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 31) Everything else held constant, in the market for reserves, decreases in the interest rate paid on excess reserves affect the federal funds rate A) when the funds rate is below the interest rate paid on excess reserves. B) when the funds rate equals the interest rate paid on excess reserves. C) when the funds rate is below the discount rate. D) when the funds rate equals the discount rate. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 32) After 2003, The Federal Reserve usually keeps the discount rate A) above the target federal funds rate. B) equal to the target federal funds rate. C) below the target federal funds rate. D) equal to zero. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 33) Everything else held constant, the vertical section of the supply curve of reserves is shortened when the A) discount rate increases. B) discount rate decreases. C) federal funds rate rises. D) federal funds rate falls. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking

34) Everything else held constant, the vertical section of the supply curve of reserves is lengthened when the A) discount rate increases. B) discount rate decreases. C) federal funds rate rises. D) federal funds rate falls. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 35) In the market for reserves, if the federal funds rate is between the discount rate and the interest rate paid on excess reserves, an increase in the reserve requirement ________ the demand for reserves, ________ the federal funds rate, everything else held constant. A) decreases; lowering B) increases; lowering C) increases; raising D) decreases; raising Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 36) In the market for reserves, if the federal funds rate is between the discount rate and the interest rate paid on excess reserves, a ________ in the reserve requirement ________ the demand for reserves, raising the federal funds interest rate, everything else held constant. A) rise; decreases B) rise; increases C) decline; increases D) decline; decreases Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 37) In the market for reserves, if the federal funds rate is between the discount rate and the interest rate paid on excess reserves, a ________ in the reserve requirement increases the demand for reserves, ________ the federal funds interest rate, everything else held constant. A) rise; lowering B) decline; raising C) decline; lowering D) rise; raising Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking

38) In the market for reserves, if the federal funds rate is between the discount rate and the interest rate paid on excess reserves, an increase in the reserve requirement ________ the demand of reserves and causes the federal funds interest rate to ________, everything else held constant. A) decreases; fall B) increases; fall C) increases; rise D) decreases; rise Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 39) In the market for reserves, if the federal funds rate is between the discount rate and the interest rate paid on excess reserves, an increase in the reserve requirement ________ the ________ for reserves and causes the federal funds interest rate to rise, everything else held constant. A) decreases; demand B) increases; demand C) increases; supply D) decreases; supply Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 40) In the market for reserves, if the federal funds rate is between the discount rate and the interest rate paid on excess reserves, a ________ in the reserve requirement ________ the demand for reserves, lowering the federal funds interest rate, everything else held constant. A) rise; decreases B) rise; increases C) decline; increases D) decline; decreases Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 41) In the market for reserves, if the federal funds rate is between the discount rate and the interest rate paid on excess reserves, a ________ in the reserve requirement decreases the demand for reserves, ________ the federal funds interest rate, everything else held constant. A) rise; lowering B) decline; raising C) decline; lowering D) rise; raising Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking

42) In the market for reserves, if the federal funds rate is between the discount rate and the interest rate paid on excess reserves, a decline in the reserve requirement ________ the ________ curve of reserves and causes the federal funds interest rate to fall, everything else held constant. A) decreases; demand B) increases; demand C) increases; supply D) decreases; supply Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 43) In the market for reserves, if the federal funds rate is between the discount rate and the interest rate paid on excess reserves, a decline in the reserve requirement ________ the demand of reserves, ________ the federal funds rate, everything else held constant. A) decreases; lowering B) increases; lowering C) increases; raising D) decreases; raising Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 44) Suppose, at a given federal funds rate, there is an excess demand for reserves in the federal funds market. If the Fed wants the federal funds rate to stay at that level, then it should undertake an open market ________ of bonds, everything else held constant. If the Fed does nothing, however, the federal funds rate will ________. A) sale; increase B) purchase; increase C) sale; decrease D) purchase; decrease Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 45) Suppose, at a given federal funds rate, there is an excess supply of reserves in the federal funds market. If the Fed wants the federal funds rate to stay at that level, then it should undertake an open market ________ of bonds, everything else held constant. If the Fed does nothing, however, the federal funds rate will ________. A) sale; increase B) purchase; increase C) sale; decrease D) purchase; decrease Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 11 Copyright © 2019 Pearson Education, Inc.

46) To make sure that the federal funds rate does not fall much below the floor set by the interest rate on excess reserves, the Federal Reserve has set up the ________ facility in which these nonbank lenders can lend to the Fed and earn an interest rate that is close to the interest rate the Fed pays on excess reserves. A) reverse repo B) Term Securities Lending C) Term Auction D) Primary Dealer Credit Answer: A Ques Status: New AACSB: Reflective Thinking 47) Explain the Fed's three tools of monetary policy and how each is used to change the money supply. Does each tool affect the monetary base or the money multiplier? Answer: The three tools are open market operations, the purchase and sale of government securities; discount policy, controlling the price and quantity of discount loans to banks; and reserve requirements, setting the percentage of deposits that banks must hold in reserve. Open market operations and the discount rate affect the monetary base, and reserve requirements affect the money multiplier. Ques Status: Previous Edition AACSB: Reflective Thinking 48) State whether the following statement is true or false AND explain why: "A decrease in the discount rate will always cause a decrease in the federal reserve funds rate." Answer: False. Since the discount rate is set above the federal funds rate, a decrease in the discount rate will only cause a decrease in the federal funds rate if the discount rate is decreased below the original federal funds rate level. If the decrease in the discount rate is such that the new rate is still above the federal funds rate, then the federal funds rate does not change, everything else held constant. Ques Status: Previous Edition AACSB: Analytical Thinking 49) State whether the following statement is true or false AND explain why: "An increase in the interest rate paid on excess reserves will always cause an increase in the federal reserve funds rate." Answer: False. If the interest rate paid on excess reserves is set below the federal funds rate, an increase in the interest rate paid on excess reserves will only cause an increase in the federal funds rate if the interest rate paid on excess reserves is increased above the original federal funds rate level. If the increase in the interest rate paid on excess reserves is such that the new rate is still below the federal funds rate, then the federal funds rate does not change, everything else held constant. Ques Status: Previous Edition AACSB: Analytical Thinking

15.2 Conventional Monetary Policy Tools 1) ________ are the most important monetary policy tool because they are the primary determinant of changes in the ________, the main source of fluctuations in the money supply. A) Open market operations; monetary base B) Open market operations; money multiplier C) Changes in reserve requirements; monetary base D) Changes in reserve requirements; money multiplier Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 2) Open market purchases raise the ________ thereby raising the ________. A) money multiplier; money supply B) money multiplier; monetary base C) monetary base; money supply D) monetary base; money multiplier Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 3) Open market purchases ________ reserves and the monetary base thereby ________ the money supply. A) raise; lowering B) raise; raising C) lower; lowering D) lower; raising Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 4) Open market sales shrink ________ thereby lowering ________. A) the money multiplier; the money supply B) the money multiplier; reserves and the monetary base C) reserves and the monetary base; the money supply D) the money base; the money multiplier Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking

5) Open market sales ________ reserves and the monetary base thereby ________ the money supply. A) raise; lowering B) raise; raising C) lower; lowering D) lower; raising Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 6) The two types of open market operations are A) offensive and defensive. B) dynamic and reactionary. C) active and passive. D) dynamic and defensive. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 7) There are two types of open market operations: ________ open market operations are intended to change the level of reserves and the monetary base, and ________ open market operations are intended to offset movements in other factors that affect the monetary base. A) defensive; dynamic B) defensive; static C) dynamic; defensive D) dynamic; static Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 8) Open market operations intended to offset movements in noncontrollable factors (such as float) that affect reserves and the monetary base are called A) defensive open market operations. B) dynamic open market operations. C) offensive open market operations. D) reactionary open market operations. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking

9) When the Federal Reserve engages in a repurchase agreement to offset a withdrawal of Treasury funds from the Federal Reserve, the open market operation is said to be A) defensive. B) offensive. C) dynamic. D) reactionary. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 10) The Federal Open Market Committee makes the Fed's decisions on the purchase or sale of government securities, but these purchases or sales are executed by the Federal Reserve Bank of A) Chicago. B) Boston. C) New York. D) San Francisco. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 11) The actual execution of open market operations is done at A) the Board of Governors in Washington, D.C. B) the Federal Reserve Bank of New York. C) the Federal Reserve Bank of Philadelphia. D) the Federal Reserve Bank of Boston. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 12) If float is predicted to decrease because of unseasonably good weather, the manager of the trading desk at the Federal Reserve Bank of New York will likely conduct a ________ open market ________ of securities. A) defensive; sale B) defensive; purchase C) dynamic; sale D) dynamic; purchase Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking

13) When bad storms slow the check-clearing process, float tends to ________ causing the Fed to initiate defensive open market ________. A) decrease; sales B) decrease; purchases C) increase; sales D) increase; purchases Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 14) When good weather speeds the check-clearing process, float tends to ________ causing the Fed to initiate defensive open market ________. A) decrease; sales B) decrease; purchases C) increase; sales D) increase; purchases Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 15) When bad storms slow the check-clearing process, float tends to ________ causing the Fed to initiate ________ open market ________. A) decrease; defensive; sales B) decrease; dynamic; purchases C) increase; defensive; sales D) increase; dynamic; purchases Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 16) When good weather speeds the check-clearing process, float tends to ________ causing the Fed to initiate ________ open market ________. A) decrease; defensive; sales B) decrease; dynamic; sales C) decrease; defensive; purchases D) increase; dynamic; purchases Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking

17) If float is predicted to increase because of bad weather, the manager of the trading desk at the New York Fed bank will likely conduct ________ open market operations to ________ reserves. A) defensive; inject B) defensive; drain C) dynamic; inject D) dynamic; drain Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 18) If float is predicted to decrease because of good weather, the manager of the trading desk at the New York Fed bank will likely conduct ________ open market operations to ________ reserves. A) defensive; inject B) defensive; drain C) dynamic; inject D) dynamic; drain Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 19) If Treasury deposits at the Fed are predicted to increase, the manager of the trading desk at the New York Fed bank will likely conduct ________ open market operations to ________ reserves. A) defensive; inject B) defensive; drain C) dynamic; inject D) dynamic; drain Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 20) If Treasury deposits at the Fed are predicted to ________, the manager of the trading desk at the New York Fed bank will likely conduct ________ open market operations to ________ reserves. A) increase; defensive; inject B) decrease; defensive; inject C) increase; dynamic; inject D) decrease; dynamic; drain Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking

21) If Treasury deposits at the Fed are predicted to fall, the manager of the trading desk at the New York Fed bank will likely conduct ________ open market operations to ________ reserves. A) defensive; inject B) defensive; drain C) dynamic; inject D) dynamic; drain Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 22) If Treasury deposits at the Fed are predicted to ________, the manager of the trading desk at the New York Fed bank will likely conduct ________ open market operations to ________ reserves. A) rise; defensive; drain B) fall; defensive; drain C) rise; dynamic; inject D) fall; dynamic; drain Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 23) If the Fed expects currency holdings to rise, it conducts open market ________ to offset the expected ________ in reserves. A) purchases; increase B) purchases; decrease C) sales; increase D) sales; decrease Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 24) If the Fed expects currency holdings to fall, it conducts open market ________ to offset the expected ________ in reserves. A) purchases; increase B) purchases; decrease C) sales; increase D) sales; decrease Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking

25) If the banking system has a large amount of reserves, many banks will have excess reserves to lend and the federal funds rate will probably ________; if the level of reserves is low, few banks will have excess reserves to lend and the federal funds rate will probably ________. A) fall; fall B) fall; rise C) rise; fall D) rise; rise Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 26) The Federal Reserve will engage in a repurchase agreement when it wants to ________ reserves ________ in the banking system. A) increase; permanently B) increase; temporarily C) decrease; temporarily D) decrease; permanently Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 27) If the Fed wants to temporarily inject reserves into the banking system, it will engage in A) a repurchase agreement. B) a matched sale-purchase transaction. C) a reverse repurchase agreement. D) an open market sale. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 28) The Fed can offset the effects of an increase in float by engaging in A) a repurchase agreement. B) a matched sale-purchase transaction. C) an interest rate swap. D) an open market purchase. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking

29) The Federal Reserve will engage in a matched sale-purchase transaction when it wants to ________ reserves ________ in the banking system. A) increase; permanently B) increase; temporarily C) decrease; temporarily D) decrease; permanently Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 30) Suppose on any given day there is an excess demand of reserves in the federal funds market. If the Federal Reserve wishes to keep the federal funds rate at its current level, then the appropriate action for the Federal Reserve to take is a ________ open market ________, everything else held constant. A) defensive; sale B) defensive; purchase C) dynamic; sale D) dynamic; purchase Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 31) Suppose on any given day the prevailing equilibrium federal funds rate is above the Federal Reserve's federal funds target rate. If the Federal Reserve wishes for the federal funds rate to be at their target level, then the appropriate action for the Federal Reserve to take is a ________ open market ________, everything else held constant. A) defensive; sale B) defensive; purchase C) dynamic; sale D) dynamic; purchase Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 32) Suppose on any given day there is an excess supply of reserves in the federal funds market. If the Federal Reserve wishes to keep the federal funds rate at its current level, then the appropriate action for the Federal Reserve to take is a ________ open market ________, everything else held constant. A) defensive; sale B) defensive; purchase C) dynamic; sale D) dynamic; purchase Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking

33) Suppose on any given day the prevailing equilibrium federal funds rate is below the Federal Reserve's federal funds target rate. If the Federal Reserve wishes for the federal funds rate to be at their target level, then the appropriate action for the Federal Reserve to take is a ________ open market ________, everything else held constant. A) defensive; sale B) defensive; purchase C) dynamic; sale D) dynamic; purchase Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 34) Discount policy affects the money supply by affecting the volume of ________ and the ________. A) excess reserves; monetary base B) borrowed reserves; monetary base C) excess reserves; money multiplier D) borrowed reserves; money multiplier Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 35) The discount rate is A) the interest rate the Fed charges on loans to banks. B) the price the Fed pays for government securities. C) the interest rate that banks charge their most preferred customers. D) the price banks pay the Fed for government securities. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 36) The most common type of discount lending that the Fed extends to banks is called A) seasonal credit. B) secondary credit. C) primary credit. D) installment credit. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking

37) The most common type of discount lending, ________ credit loans, are intended to help healthy banks with short-term liquidity problems that often result from temporary deposit outflows. A) secondary B) primary C) temporary D) seasonal Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 38) The Fed's discount lending is of three types: ________ is the most common category; ________ is given to a limited number of banks in vacation and agricultural areas; ________ is given to banks that have experienced severe liquidity problems. A) seasonal credit; secondary credit; primary credit B) secondary credit; seasonal credit; primary credit C) primary credit; seasonal credit; secondary credit D) seasonal credit; primary credit; secondary credit Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 39) The discount rate is kept ________ the federal funds rate because the Fed prefers that ________. A) below; banks borrow reserves from each other B) below; banks borrow reserves from the Fed C) above; banks borrow reserves from each other D) above; banks borrow reserves from the Fed Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 40) The discount rate is kept ________ the federal funds rate because the Fed prefers that ________. A) below; banks can monitor each other for credit risk B) below; the Fed can monitor banks for credit risk C) above; banks can monitor each other for credit risk D) above; the Fed can monitor banks for credit risk Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking

41) The Fed prefers that ________ so that ________. A) banks borrow reserves from each other; banks can monitor each other for credit risk B) banks borrow reserves from each other; the Fed can monitor banks for credit risk C) banks borrow reserves from the Fed; banks can monitor each other for credit risk D) banks borrow reserves from the Fed; the Fed can monitor banks for credit risk Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 42) The discount rate refers to the interest rate on A) primary credit. B) secondary credit. C) seasonal credit. D) federal funds. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 43) The interest rate on secondary credit is set ________ basis points ________ the primary credit rate. A) 100; above B) 100; below C) 50; above D) 50; below Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 44) The interest rate on seasonal credit equals A) the federal funds rate. B) the primary credit rate. C) the secondary credit rate. D) an average of the federal funds rate and rates on certificates of deposits. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 45) The Fed is considering eliminating A) primary credit lending. B) secondary credit lending. C) seasonal credit lending. D) its lender of last resort function. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking

46) At its inception, the Federal Reserve was intended to be A) the Treasury's banker. B) the issuer of government debt. C) a lender-of-last-resort. D) a regulator of bank holding companies. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 47) Much of the credit for prevention of a financial market meltdown after "Black Monday" (October 19, 1987) must be given to the Federal Reserve System and then-chairman A) Paul Volcker. B) Alan Blinder. C) Arthur Burns. D) Alan Greenspan. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 48) A financial panic was averted in October 1987 following "Black Monday" when the Fed announced that A) it was lowering the discount rate. B) it would provide discount loans to any bank that would make loans to the security industry. C) it stood ready to purchase common stocks to prevent a further slide in stock prices. D) it was raising the discount rate. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 49) The Fed's lender-of-last-resort function A) has proven to be ineffective. B) cannot prevent runs by large depositors. C) is no longer necessary due to FDIC insurance. D) creates a moral hazard problem. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 50) The most important advantage of discount policy is that the Fed can use it to A) precisely control the monetary base. B) perform its role as lender of last resort. C) control the money supply. D) punish banks that have deficient reserves. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 24 Copyright © 2019 Pearson Education, Inc.

51) An increase in ________ reduces the money supply since it causes the ________ to fall. A) reserve requirements; monetary base B) reserve requirements; money multiplier C) margin requirements; monetary base D) margin requirements; money multiplier Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 52) A decrease in ________ increases the money supply since it causes the ________ to rise. A) reserve requirements; monetary base B) reserve requirements; money multiplier C) margin requirements; monetary base D) margin requirements; money multiplier Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 53) The Federal Reserve has had the authority to vary reserve requirements since the A) 1920s. B) 1930s. C) 1940s. D) 1950s. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 54) Since 1980, ________ are subject to reserve requirements. A) only commercial banks B) only the member institutions of the Federal Reserve C) only nationally chartered depository institutions D) all depository institutions Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 55) Funds held in ________ are subject to reserve requirements. A) all checkable deposits B) all checkable and time deposits C) all checkable, time, and money market fund deposits D) all time deposits Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking

56) The policy tool of changing reserve requirements is A) the most widely used. B) the preferred tool from the bank's perspective. C) no longer used. D) still used, even with its disadvantages. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 57) When the Fed wants to raise interest rates after banks have accumulated large amounts of excess reserves, it would A) increase the interest rate paid on excess reserves. B) increase discount rate. C) increase the required reserve ratio. D) conduct massive open market purchase. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 58) Explain dynamic and defensive open market operations. What is the purpose of each type? Describe two situations when defensive open market operations are used. How are defensive open market operations typically conducted? Answer: Dynamic OMOs are used to permanently change the monetary base and money supply. Defensive operations are used to offset temporary changes in the monetary base and/or money supply. Defensive operations are used to offset float, shifts in Treasury balances into or out of the Fed, and temporary changes in currency. Defensive purchases are typically conducted by using repurchase agreements, while reverse repos or matched sale-purchase transactions are used to conduct defensive open market sales. Ques Status: Previous Edition AACSB: Reflective Thinking

15.3 Nonconventional Monetary Policy Tools and Quantitative Easing 1) From before the financial crisis began in September of 2007 to when the crisis was over at the end of 2009, amount of Federal Reserve assets rose, leading to A) a huge increase in the monetary base. B) a huge expansion of the money supply. C) an economic expansion. D) a high inflation. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 2) From before the financial crisis began in September of 2007 to when the crisis was over at the end of 2009, the huge expansion in the Fed's balance sheet and the monetary base did not result in a large increase in monetary supply because A) most of it just flowed into holdings of excess reserve. B) the Fed also increased the required reserve ratio. C) the Fed also conducted open market sales. D) the discount loan decreased. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 3) Which of the following monetary policy tools is more effective when the economy faces the interest rate zero-lower-bound problem? A) open market operation B) discount policy C) required reserve ratio D) the Fed's liquidity provision Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 4) The purpose of the commitment by the Fed to keep the federal funds rate at zero for a long period of time is to A) lower the long term interest rates. B) lower the short term interest rates. C) increase the long term interest rates. D) increase the short term interest rates. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking

5) The interest rate for primary credit is USUALLY set ________ basis points ________ the federal funds rate. In March 2008, this gap was changed to ________ basis points. A) 50; below; 100 B) 100; above; 25 C) 100; below; 50 D) 50; above; 25 Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 6) The facility that was created in December of 2007 that banks can use to borrow from the Fed that has less of a stigma for banks compared to borrowing from the discount window is the A) Term Securities Lending Facility. B) Term Auction Facility. C) Primary Dealer Credit Facility. D) Commercial Paper Funding Facility. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 7) The Fed's open market operations normally involve only the purchase of government securities, particularly those that are short-term. However, during the crisis, the Fed started new programs to purchase A) mortgage-backed securities and long-term Treasuries. B) mortgage-backed securities and Treasury bills. C) commercial papers and short-term Treasuries. D) Treasury bills and Treasury notes. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 8) To lower interest rates on residential mortgages to stimulate the housing market, the Fed extended its open market operations to purchase A) mortgage-backed securities. B) commercial papers. C) long-term Treasuries. D) Treasury bills and Treasury notes. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge

9) To lower long-term interest rates, in 2010 the Fed started its new open market operation program to purchase A) mortgage-backed securities. B) commercial papers. C) long-term Treasuries. D) Treasury bills and Treasury notes. Answer: C Ques Status: Previous Edition AACSB: Application of Knowledge 10) Which of the following statements is an example of the Fed's conditional commitment policy? A) "In these circumstances, the Committee believes that policy accommodation can be maintained for a considerable period." B) "The Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time." C) "Policy accommodation can be removed at a pace that is likely to be measured." D) "The exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, and inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal." Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 11) The purpose for a central bank to set negative interest rates on bank's deposit is to A) stimulate the economy by encouraging banks to lend out the deposits they were keeping at the central bank. B) increase bank's cost to holding cash. C) prevent banks from paying positive interest rates to their depositors. D) make banks less likely to lend. Answer: A Ques Status: New AACSB: Reflective Thinking

15.4 Monetary Policy Tools of the European Central Bank 1) The European System of Central Banks signals the stance of its monetary policy by setting a target for the A) federal funds rate. B) overnight cash rate. C) lombard rate. D) reserve rate. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 2) When the European System of Central Banks uses main refinancing operations, it is similar to the Federal Reserve using A) dynamic open market operations. B) defensive open market operations. C) discount policy. D) reserve requirements. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 3) When the European System of Central Banks uses long-term refinancing operations, it is similar to the Federal Reserve using A) dynamic open market operations. B) defensive open market operations. C) discount policy. D) reserve requirements. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 4) The equivalent to the Federal Reserve's discount rate in the European System of Central Banks is the A) federal funds rate. B) marginal lending rate. C) deposit facility rate. D) lombard rate. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking

5) Which of the following statements about the deposit facility in the Eurosystem are correct? A) Banks are paid an interest rate that is typically 100 basis points below the target financing rate. B) The prespecified interest rate on the deposit facility provides a floor for the overnight market interest rate. C) The interest rate on reserves set by the ECB is not always positive. D) All of the above. E) Only A and B. Answer: D Ques Status: New AACSB: Reflective Thinking

Economics of Money, Banking, and Financial Markets, 12e (Mishkin) Chapter 16 The Conduct of Monetary Policy: Strategy and Tactics 16.1 The Price Stability Goal and The Nominal Anchor 1) The most common definition that monetary policymakers use for price stability is A) low and stable deflation. B) an inflation rate of zero percent. C) high and stable inflation. D) low and stable inflation. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 2) Inflation results in A) ease of planning for the future. B) ease of comparing prices over time. C) lower nominal interest rates. D) difficulty interpreting relative price movements. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 3) Economists believe that countries recently suffering hyperinflation have experienced A) reduced growth. B) increased growth. C) reduced prices. D) lower interest rates. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 4) A nominal variable, such as the inflation rate or the money supply, which ties down the price level to achieve price stability is called ________ anchor. A) a nominal B) a real C) an operating D) an intermediate Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking

5) A central feature of monetary policy strategies in all countries is the use of a nominal variable that monetary policymakers use as an intermediate target to achieve an ultimate goal such as price stability. Such a variable is called a nominal A) anchor. B) benchmark. C) tether. D) guideline. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 6) A nominal anchor promotes price stability by A) outlawing inflation. B) stabilizing interest rates. C) keeping inflation expectations low. D) keeping economic growth low. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 7) Monetary policy is considered time-inconsistent because A) of the lag times associated with the implementation of monetary policy and its effect on the economy. B) policymakers are tempted to pursue discretionary policy that is more contractionary in the short run. C) policymakers are tempted to pursue discretionary policy that is more expansionary in the short run. D) of the lag times associated with the recognition of a potential economic problem and the implementation of monetary policy. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 8) The time-inconsistency problem with monetary policy tells us that, if policymakers use discretionary policy, there is a higher probability that the ________ will be higher, compared to policy makers following a behavior rule. A) inflation rate B) unemployment rate C) interest rate D) foreign exchange rate Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking

9) The theory that monetary policy conducted on a discretionary, day-by-day basis leads to poor long-run outcomes is referred to as the A) adverse selection problem. B) moral hazard problem. C) time-inconsistency problem. D) nominal-anchor problem. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 10) The ________ problem of discretionary policy arises because economic behavior is influenced by what firms and people expect the monetary authorities to do in the future. A) moral hazard B) time-inconsistency C) nominal-anchor D) rational-expectation Answer: B Ques Status: Previous Edition AACSB: Written and Oral Communication 11) If the central bank pursues a monetary policy that is more expansionary than what firms and people expect, then the central bank must be trying to A) boost output in the short run. B) constrain output in the short run. C) constrain prices. D) boost prices in the short run. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 12) The time-inconsistency problem in monetary policy can occur when the central bank conducts policy A) using a nominal anchor. B) using a strict and inflexible rule. C) on a discretionary, day-by-day basis. D) using a flexible, discretionary rule. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking

13) Explain the time-inconsistency problem. What is the likely outcome of discretionary policy? What are the solutions to the time-inconsistency problem? Answer: With policy discretion, policymakers have an incentive to attempt to increase output by pursuing expansionary policies once expectations are set. The problem is that this policy results not in higher output, but in higher actual and expected inflation. The solution is to adopt a rule to constrain discretion. Nominal anchors can provide the necessary constraint on discretionary behavior. Ques Status: Previous Edition AACSB: Reflective Thinking 16.2 Other Goals of Monetary Policy 1) Even if the Fed could completely control the money supply, monetary policy would have critics because A) the Fed is asked to achieve many goals, some of which are incompatible with others. B) the Fed's goals do not include high employment, making labor unions a critic of the Fed. C) the Fed's primary goal is exchange rate stability, causing it to ignore domestic economic conditions. D) it is required to keep Treasury security prices high. Answer: A Ques Status: Previous Edition AACSB: Written and Oral Communication 2) High unemployment is undesirable because it A) results in a loss of output. B) always increases inflation. C) always increases interest rates. D) reduces idle resources. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 3) When workers voluntarily leave work while they look for better jobs, the resulting unemployment is called A) structural unemployment. B) frictional unemployment. C) cyclical unemployment. D) underemployment. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking

4) Unemployment resulting from a mismatch of workers' skills and job requirements is called A) frictional unemployment. B) structural unemployment. C) seasonal unemployment. D) cyclical unemployment. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 5) The goal for high employment should be a level of unemployment at which the demand for labor equals the supply of labor. Economists call this level of unemployment the A) frictional level of unemployment. B) structural level of unemployment. C) natural rate level of unemployment. D) Keynesian rate level of unemployment. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 6) Supply-side economic policies seek to A) raise interest rates through contractionary monetary policy. B) increase federal government expenditures. C) increase consumption expenditures by increasing taxes. D) increase saving and investment using tax incentives. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 7) The Federal Reserve System was created to A) make it easier to finance budget deficits. B) promote financial market stability. C) lower the unemployment rate. D) promote rapid economic growth. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 8) Having interest rate stability A) allows for less uncertainty about future planning. B) leads to demands to curtail the Fed's power. C) guarantees full employment. D) leads to problems in financial markets. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking

9) Foreign exchange rate stability is important because a decline in the value of the domestic currency will ________ the inflation rate, and an increase in the value of the domestic currency makes domestic industries ________ competitive with competing foreign industries. A) increase; more B) increase; less C) decrease; more D) decrease; less Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 16.3 Should Price Stability be the Primary Goal of Monetary Policy? 1) Which set of goals can, at times, conflict in the short run? A) high employment and economic growth B) interest rate stability and financial market stability C) high employment and price level stability D) exchange rate stability and financial market stability Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 2) The primary goal of the European Central Bank is A) price stability. B) exchange rate stability. C) interest rate stability. D) high employment. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 3) The mandate for the monetary policy goals that has been given to the European Central Bank is an example of a ________ mandate. A) primary B) dual C) secondary D) hierarchical Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking

4) The mandate for the monetary policy goals that has been given to the Federal Reserve System is an example of a ________ mandate. A) primary B) dual C) secondary D) hierarchical Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 5) Either a dual or hierarchial mandate is acceptable as long as ________ is the primary goal in the ________. A) price stability; short run B) price stability; long run C) reducing business-cycle fluctuations; short run D) reducing business-cycle fluctuations; long run Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 16.4 Inflation Targeting 1) The type of monetary policy that is used in Canada, New Zealand, and the United Kingdom is A) monetary targeting. B) inflation targeting. C) targeting with an implicit nominal anchor. D) interest-rate targeting. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 2) Which of the following is NOT an element of inflation targeting? A) a public announcement of medium-term numerical targets for inflation B) an institutional commitment to price stability as the primary long-run goal C) an information-inclusive approach in which only monetary aggregates are used in making decisions about monetary policy D) increased accountability of the central bank for attaining its inflation objectives Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking

3) The first country to adopt inflation targeting was A) the United Kingdom. B) Canada. C) New Zealand. D) Australia. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 4) In both New Zealand and Canada, what has happened to the unemployment rate since the countries adopted inflation targeting? A) The unemployment rate increased sharply. B) The unemployment rate remained constant. C) The unemployment rate has declined substantially after a sharp increase. D) The unemployment rate declined sharply immediately after the inflation targets were adopted. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 5) Which of the following is NOT an advantage of inflation targeting? A) reduction of the time-inconsistency problem B) increased monetary policy transparency C) There is an immediate signal on the achievement of the target. D) consistency with democratic principles Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 6) Which of the following is NOT a disadvantage to inflation targeting? A) There is a delayed signal about achievement of the target. B) Inflation targets could impose a rigid rule on policymakers. C) There is potential for larger output fluctuations. D) There is a lack of transparency. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 7) The decision by inflation targeters to choose inflation targets ________ zero reflects the concern of monetary policymakers that particularly ________ inflation can have substantial negative effects on real economic activity. A) below; high B) below; low C) above; high D) above; low Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 8 Copyright © 2019 Pearson Education, Inc.

8) Inflation targets can increase the central bank's flexibility in responding to declines in aggregate spending. Declines in aggregate ________ that cause the inflation rate to fall below the floor of the target range will automatically stimulate the central bank to ________ monetary policy without fearing that this action will trigger a rise in inflation expectations. A) demand: tighten B) demand; loosen C) supply; tighten D) supply; loosen Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 9) Explain what inflation targeting is. What are the advantages and disadvantages of this type of monetary policy strategy? Answer: There are five main elements to inflation targeting: 1. a public announcement of a medium-term target for the inflation rate; 2. a commitment to price stability as the primary longterm goal of policy; 3. many variables are used in making decisions about policy moves; 4. increased transparency about policy strategy with the public; 5. the central bank has increased accountability for attaining policy goals. The advantages of inflation targeting include: 1. the simplicity and clarity of a numerical target for the inflation rate; 2. there is increased accountability of the central bank; 3. reduces the effects of inflationary shocks. The disadvantages of inflation targeting include: 1. there is a delayed signal about the achievement of the target; 2. it could lead to a rigid rule where the only focus is the inflation rate (has not happened in practice); 3. if sole focus is the inflation rate, larger output fluctuations can occur (has not happened in practice). Ques Status: Previous Edition AACSB: Reflective Thinking

16.5 The Evolution of the Federal Reserve's Monetary Policy Strategy 1) The type of monetary policy regime that the Federal Reserve has followed From the 1980s up until the time Ben Bernanke became chair of the Federal Reserve in 2006 can best be described as A) monetary targeting. B) inflation targeting. C) policy with an implicit nominal anchor. D) exchange-rate targeting. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 2) Estimates from large macroeconometric models of the U.S. economy suggests that it takes over ________ for monetary policy to affect output and over ________ for monetary policy to affect the inflation rate. A) 1 year; 2 years B) 2 years; 1 year C) 1 year; 6 months D) 6 months; 1 year Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 3) Which of the following is NOT a disadvantage of of the Fed's "just do it" approach to monetary policy? A) There is low transparency of policy. B) There is low accountability for central bankers. C) This type of policy make the Fed more susceptible to the time-inconsistency problem. D) It relies on a stable money-inflation relationship. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 4) Suppose it takes roughly two years for monetary policy to have a significant impact on inflation. If inflation is currently low but policymakers believe inflation will rise over the next two years with an unchanged stance of monetary policy, when should they tighten monetary policy to prevent the inflationary surge? A) now B) wait until overt signs of inflation appear C) next year D) two years later Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking

5) Under Alan Greenspan and Ben Bernanke, the Federal Reserve was successful in pursuing a ________ policy. A) preemptive B) inflation targeting C) exchange rate targeting D) monetary targeting Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 6) After Ben Bernanke became chair of the Fed in 2006, he A) increased Fed transparency. B) abandoned inflation targeting. C) used "just do it" policy. D) increased the opacity of the policymaking. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 7) The FOMC finally moved to ________ on January 25, 2012, when it issued its "Statement on Long-Run Goals and Monetary Policy Strategy." A) inflation targeting B) zero inflation policy C) "just do it" policy D) monetary targeting Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 8) In the FOMC's "Statement on Long-Run Goals and Monetary Policy Strategy,"the FOMC agreed to a single numerical value of the inflation objective, 2% on the ________. A) PCE deflator B) GDP deflator C) CPI D) PPI Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking

9) The FOMC "Statement on Long-Run Goals and Monetary Policy Strategy"made it clear that the Federal Reserve would be pursuing ________, consistent with its dual mandate. A) a flexible form of inflation targeting B) a strict form of inflation targeting C) a zero inflation targeting D) an implicit inflation targeting Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 16.6 Lessons for Monetary Policy Strategy from the Global Financial Crisis 1) Lessons that economists and policy makers have learned from the recent global financial crisis include A) Developments in the financial sector have a far greater impact on economic activity than was earlier realized. B) The zero lower bound on interest rates can be a serious problem. C) The cost of cleaning up after a financial crisis is very high. D) Price and output stability do not ensure financial stability. E) All of the above. Answer: E Ques Status: Previous Edition AACSB: Reflective Thinking 2) The problems of raising the level of the inflation target include A) if the zero-lower-bound problem is rare, then the benefits of a higher inflation target are not very large. B) the costs of higher inflation in terms of the distortions it produces in the economy are high. C) it is more difficult to stabilize the inflation rate at a higher targeting level. D) all of the above. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking

16.7 Should Central Banks Try to Stop Asset-Price Bubbles? 1) The "Greenspan doctrine"—central banks should not try to prick bubbles—was based on which of the following arguments? A) Asset-price bubbles are nearly impossible to identify. B) Monetary actions would be likely to affect asset prices in general, rather than the specific assets that are experiencing a bubble. C) Raising interest rates has often been found to cause a bubble to burst more severely. D) Monetary policy actions to prick bubbles can have harmful effects on the aggregate economy. E) All of the above. Answer: E Ques Status: Previous Edition AACSB: Reflective Thinking 2) When asset prices increase above their fundamental values it is called an A) asset-price bubble. B) irrational bubble. C) asset-price spike. D) irrational spike. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 3) Suppose interest rates are kept very low for a long time such that there is a spike in the amount of lending. Everything else held constant, this could cause ________ bubble. A) an irrational exuberance B) a credit-driven C) a stock D) a debt-driven Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 4) A credit-driven bubble arises when ________ in lending causes ________ in asset prices which can cause ________ in lending. A) a decrease; a decrease; an increase B) a decrease; an increase; an increase C) an increase; an increase; a further increase D) a decrease; a decrease; a further decrease Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking

5) ________ bubble is driven entirely by unrealistic optimistic expectations. A) An irrational exuberance B) A credit-driven C) A stock D) A debt-driven Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 6) Everything else held constant, a credit-drive bubble is generally considered to have the potential to cause ________ damage to an economy compared to an irrational exuberance bubble. A) less B) about the same amount of C) more D) either more, less, or the same amount of Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 7) A central bank has ________ chance to identify a credit-driven bubble compared to an irrational exuberance bubble. A) a greater B) less of a C) about the same level of a D) a greater, less or about the same level of a Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 8) Which of the following is NOT an argument against using monetary policy to prick assetprice bubbles? A) The effect of increasing interest rates on asset prices is uncertain. B) A bubble may only exist in some asset-prices and monetary policy will affect all asset prices. C) Using monetary policy to prick an asset-price bubble may have adverse effect on the aggregate economy. D) Even though credit-drive bubbles are easier to identify, they are still relatively hard to identify. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking

16.8 Tactics: Choosing the Policy Instrument 1) Which of the following is NOT an operating instrument? A) nonborrowed reserves B) monetary base C) federal funds interest rate D) discount rate Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 2) Which of the following is a potential operating instrument for the central bank? A) the monetary base B) the M1 money supply C) nominal GDP D) the discount rate Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 3) Due to the lack of timely data for the price level and economic growth, the Fed's strategy A) targets the exchange rate, since the Fed can control this variable. B) targets the price of gold, since it is closely related to economic activity. C) uses an intermediate target, such as an interest rate. D) stabilizes the consumer price index, since the Fed can control the CPI. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 4) If the central bank targets a monetary aggregate, it is likely to lose control over the interest rate because A) of fluctuations in the demand for reserves. B) of fluctuations in the consumption function. C) bond values will tend to remain stable. D) of fluctuations in the business cycle. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking

5) If the Fed pursues a strategy of targeting an interest rate when fluctuations in money demand are prevalent A) fluctuations of nonborrowed reserves will be small. B) fluctuations of nonborrowed reserves will be large. C) the Fed will probably quickly abandon this policy, as it did in the 1960s. D) the Fed will probably quickly abandon this policy, as it did in the 1950s. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 6) Fluctuations in the demand for reserves cause the Fed to lose control over a monetary aggregate if the Fed targets A) a monetary aggregate. B) the monetary base. C) an interest rate. D) nominal GDP. Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 7) Real interest rates are difficult to measure because A) data on them are not available in a timely manner. B) real interest rates depend on the hard-to-determine expected inflation rate. C) they fluctuate too often to be accurate. D) they cannot be controlled by the Fed. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 8) Which of the following criteria need NOT be satisfied for choosing a policy instrument? A) The variable must be measurable. B) The variable must be controllable. C) The variable must be predictable. D) The variable must be transportable. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 9) Which of the following is NOT a requirement in selecting a policy instrument? A) measurability B) controllability C) flexibility D) predictability Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 16 Copyright © 2019 Pearson Education, Inc.

10) When it comes to choosing an policy instrument, both the ________ rate and ________ aggregates are measured accurately and are available daily with almost no delay. A) three-month T-bill; monetary B) three-month T-bill; reserve C) federal funds; monetary D) federal funds; reserve Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 11) Explain and demonstrate graphically how targeting nonborrowed reserves can result in federal funds rate instability. Answer: See figure below.

When nonborrowed reserves are held constant, increases in the demand for reserves result in the federal funds rate increasing and decreases in the demand for nonborrowed reserves result in the federal funds rate declining. Since fluctuations in demand do not cause monetary policy actions, the result is the federal funds rate will fluctuate (assuming the equilibrium federal funds rate is below the discount rate). Ques Status: Previous Edition AACSB: Reflective Thinking

12) Explain and demonstrate graphically how targeting the federal funds rate can result in fluctuations in nonborrowed reserves. Answer: See figure below.

With a federal funds rate target, fluctuations in demand for reserves require similar changes in the nonborrowed reserves to keep the federal funds rate constant. Ques Status: Previous Edition AACSB: Reflective Thinking

16.9 Tactics: The Taylor Rule 1) According to the Taylor rule, the Fed should raise the federal funds interest rate when inflation ________ the Fed's inflation target or when real GDP ________ the Fed's output target. A) rises above; drops below B) drops below; drops below C) rises above; rises above D) drops below; rises above Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 2) Using Taylor's rule, when the equilibrium real federal funds rate is 3 percent, the positive output gap is 2 percent, the target inflation rate is 1 percent, and the actual inflation rate is 2 percent, the nominal federal funds rate target should be A) 5 percent. B) 5.5 percent. C) 6 percent. D) 6.5 percent. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 3) Using Taylor's rule, when the equilibrium real federal funds rate is 2 percent, there is no output gap, the actual inflation rate is zero, and the target inflation rate is 2 percent, the nominal federal funds rate should be A) 0 percent. B) 1 percent. C) 2 percent. D) 3 percent. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 4) According to the Taylor Principle, when the inflation rate rises, the nominal interest rate should be ________ by ________ than the inflation rate increase. A) increased; more B) increased; less C) decreased; more D) decreased; less Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking

5) If the Taylor Principle is not followed and nominal interest rates are increased by less than the increase in the inflation rate, then real interest rates will ________ and monetary policy will be too ________. A) rise; tight B) rise; loose C) fall; tight D) fall; loose Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 6) The rate of inflation tends to remain constant when A) the unemployment rate is above the NAIRU. B) the unemployment rate equals the NAIRU. C) the unemployment rate is below the NAIRU. D) the unemployment rate increases faster than the NAIRU increases. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 7) The rate of inflation increases when A) the unemployment rate equals the NAIRU. B) the unemployment rate exceeds the NAIRU. C) the unemployment rate is less than the NAIRU. D) the unemployment rate increases faster than the NAIRU increases. Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 8) Explain the Taylor rule, including the formula for setting the federal funds rate target, and the components of the formula. If the Fed were to use this rule, how many goals would it use to set monetary policy? Answer: The Taylor rule specifies that the target federal fund rates should be set to equal the equilibrium real federal funds rate, plus the rate of inflation (for the Fisher effect), plus one-half times the output gap, plus one-half times the inflation gap. The formula is Federal funds rate target = equilibrium real federal funds rate + inflation rate +

(output gap) +

(inflation gap)

The output gap is the percentage deviation of real GDP from potential full-employment real GDP. The inflation gap is the difference between actual inflation and the central bank's target rate of inflation. The equilibrium real federal funds rate is the real rate consistent with full employment in the long run. The inflation rate is the actual rate of inflation. The Taylor rule sets the federal funds rate recognizing the goals of low inflation and full employment (or equilibrium long-run economic growth). Ques Status: Previous Edition AACSB: Written and Oral Communication 20 Copyright © 2019 Pearson Education, Inc.

16.10 Web Appendix 1: Monetary Targeting 1) In pursuing a strategy of monetary targeting, the central bank announces that it will achieve a certain value (the target) of the annual growth rate of a ________. A) a monetary aggregate B) a reserve aggregate C) the monetary base D) GDP Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 2) During the years 1979 to 1982, the Federal Reserve's announced policy was monetary targeting. During this time period the Federal Reserve A) hit all of their monetary targets. B) did not hit any of their monetary targets because it is believed that controlling the money supply was not the intent of the Federal Reserve. C) did not hit any of their monetary targets because they were unrealistic. D) hit about half of their monetary targets. Answer: B Ques Status: Previous Edition AACSB: Application of Knowledge 3) Compared to the United States, Japan's experience with monetary targeting during the 1978– 1987 period performed A) better with regard to the inflation rate and output fluctuations. B) worse with regard to the inflation rate and output fluctuations. C) better with regard to the inflation rate, but worse with regard to output fluctuations. D) worse with regard to the inflation rate, but better with regard to output fluctuations. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 4) One of the factors that contributed to the success German policymakers had using a monetary targeting type policy starting in the mid-1970s and continuing through the next two decades was that A) they used a rigid target for the money growth rate. B) they implemented policy so their inflation rate goal was met in the short run. C) the money target was flexible to allow the Bundesbank to concentrate on other goals as needed. D) they rarely communicated the intentions of policy to the public in order to keep the public from panicking. Answer: C Ques Status: Previous Edition AACSB: Application of Knowledge

5) The European Central Bank (ECB) pursues a hybrid monetary policy strategy that has elements in common with the ________-targeting strategy previously used by the Bundesbank but also includes some elements of ________ targeting. A) monetary; inflation B) inflation; monetary C) monetary; exchange rate D) monetary; nominal GDP Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 6) Which of the following is an advantage to money targeting? A) There is an immediate signal on the achievement of the target. B) It does not rely on a stable money-inflation relationship. C) It implies lack of transparency. D) It implies smaller output fluctuations. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 7) Which of the following is a disadvantage to monetary targeting? A) It relies on a stable money-inflation relationship. B) There is a delayed signal about the achievement of a target. C) It implies larger output fluctuations. D) It implies a lack of transparency. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 8) If the relationship between the monetary aggregate and the goal variable is weak, then A) monetary aggregate targeting is superior to exchange-rate targeting. B) monetary aggregate targeting is superior to inflation targeting. C) inflation targeting is superior to exchange-rate targeting. D) monetary aggregate targeting will not work. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 9) The monetary policy strategy that relies on a stable money-income relationship is A) exchange-rate targeting. B) monetary targeting. C) inflation targeting. D) the implicit nominal anchor. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 22 Copyright © 2019 Pearson Education, Inc.

16.11 Web Appendix 2: A Brief History of Federal Reserve Policymaking 1) In its earliest years, the Federal Reserve's guiding principle for the conduct of monetary policy was known as the A) real bills doctrine. B) liberal liquidity doctrine. C) free reserves doctrine. D) quantity theory of money. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 2) The guiding principle for the conduct of monetary policy that held that as long as loans were being made for "productive" purposes, then providing reserves to the banking system to make these loans would not be inflationary became known as the A) free reserves doctrine. B) Benjamin Strong doctrine. C) efficient liquidity doctrine. D) real bills doctrine. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 3) The real bills doctrine was the guiding principle for the conduct of monetary policy during the A) 1910s. B) 1940s. C) 1950s. D) 1960s. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 4) The Fed accidentally discovered open market operations in the early A) 1920s. B) 1910s. C) 1900s. D) 1890s. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking

5) The Fed accidentally discovered open market operations when A) it came to the rescue of failing banks in the early 1930s, and found that its purchases of bank loans injected reserves into the banking system. B) it purchased securities for income following the 1920-1921 recession. C) it attempted to slow inflation in 1919 by selling securities and found that its sales drained reserves from the banking system. D) it reinterpreted a key provision of the Federal Reserve Act. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 6) The Fed's mistakes of the early 1930s were compounded by its decision to A) raise reserve requirements in 1936-1937. B) lower reserve requirements in 1936-1937. C) raise the monetary base in 1936-1937. D) lower the monetary base in 1936-1937. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 7) During World War II, whenever interest rates would ________ and the price of bonds would begin to ________, the Fed would make open market purchases. A) rise; rise B) rise; fall C) fall; rise D) fall; fall Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 8) During World War II, whenever interest rates would rise and the price of bonds would begin to fall, the Fed would A) lower reserve requirements. B) raise reserve requirements. C) make open market purchases of government securities. D) make open market sales of government securities. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking

9) During World War II, the Fed in effect relinquished its control of monetary policy through its policy of A) continually lowering reserve requirements. B) continually raising reserve requirements. C) pegging interest rates. D) targeting free reserves. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 10) The Fed was committed to keeping interest rates low to assist Treasury financing of budget deficits A) only during World War I. B) during the Great Depression. C) during World War I and World War II. D) throughout the entire existence of the Fed. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 11) The Fed-Treasury Accord of March 1951 provided the Fed greater freedom to A) let interest rates increase. B) let unemployment increase. C) let inflation accelerate. D) let exchange rates increase. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 12) During the 1950s, the Fed targeted A) M1. B) M2. C) the monetary base. D) money market conditions. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 13) During the 1950s, Fed monetary policy targeted A) the monetary base. B) the exchange rate. C) discount loans. D) interest rates. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 25 Copyright © 2019 Pearson Education, Inc.

14) Targeting interest rates can be procyclical because A) an increase in income increases interest rates, causing the Fed to buy bonds, increasing the monetary base and money supply, leading to further increases in income. B) an increase in interest rates increases income, causing the Fed to buy bonds, increasing the monetary base and money supply, leading to further increases in income. C) an increase in the monetary base increases the money supply, causing the Fed to buy bonds, increasing the monetary base and money supply, leading to further increases in income. D) an increase in income increases the monetary base and money supply, causing the Fed to buy bonds to increase interest rates and income. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 15) High inflation can spiral out of control when A) expected inflation increases nominal interest rates, causing the Fed to buy bonds, increasing the money supply and further increasing inflation. B) expected inflation decreases nominal interest rates, causing the Fed to buy bonds, increasing the money supply and further increasing inflation. C) expected inflation increases nominal interest rates, causing the Fed to sell bonds, increasing the money supply and further increasing inflation. D) expected inflation decreases nominal interest rates, causing the Fed to sell bonds, increasing the money supply and further increasing inflation. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 16) In practice, the Fed's policy of targeting money market conditions in the 1960s proved to be A) countercyclical, helping to stabilize the economy. B) procyclical, destabilizing the economy. C) procyclical, helping to stabilize the economy. D) countercyclical, destabilizing the economy. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 17) In practice, the Fed's policy of targeting ________ in the 1960s proved to be ________, destabilizing the economy. A) money market conditions; countercyclical B) money market conditions; procyclical C) monetary aggregates; countercyclical D) monetary aggregates; procyclical Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking

18) Although the Fed professed employment of a monetary aggregate targeting strategy during the 1970s, its behavior suggests that it emphasized A) free-reserve targeting. B) interest-rate targeting. C) a real-bills doctrine. D) price-index targeting. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 19) Although the Fed professed employment of ________ targeting during the 1970s, its behavior suggests that it emphasized ________ targeting. A) free-reserve; interest-rate B) interest-rate; monetary aggregate C) monetary aggregate; interest-rate D) free reserve; monetary aggregate Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 20) The Fed's use of the federal funds rate as an operating target in the 1970s resulted in A) countercyclical monetary policy. B) too slow growth in M1 throughout the decade. C) procyclical monetary policy. D) too rapid growth in M1 throughout the decade. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 21) The Fed's use of the ________ as an operating target in the 1970s resulted in ________ monetary policy. A) federal funds rate; countercyclical B) federal funds rate; procyclical C) M1 money supply; countercyclical D) M1 money supply; procyclical Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking

22) In the 1970s, the Fed selected an interest rate as an operating target rather than a reserve aggregate primarily because it A) had no interest in targeting a monetary aggregate, as evidenced by its unwillingness to target a reserve aggregate. B) was still very concerned with achieving interest rate stability. C) was committed to targeting free reserves. D) was committed to the real bills doctrine. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 23) The Fed operating procedures employed between 1979 and 1982 resulted in ________ swings in the federal funds rate and ________ swings in the M1 growth rate. A) increased; increased B) increased; decreased C) decreased; decreased D) decreased; increased Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 24) The fluctuations in both money supply growth and the federal funds rate during 1979-1982 suggest that the Fed A) had shifted to borrowed reserves as an operating target. B) had shifted to total reserves as an operating target. C) had shifted to the monetary base as an operating target. D) never intended to target monetary aggregates. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 25) Large fluctuations in money supply growth and smaller fluctuations in the federal funds rate between October 1982 and the early 1990s indicate that the Fed had shifted to ________ as an operating target. A) borrowed reserves B) nonborrowed reserves C) excess reserves D) required reserves Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking

26) The strengthening of the dollar between 1980 and 1985 contributed to a ________ in American competitiveness, putting pressure on the Fed to pursue a more ________ monetary policy. A) decrease; contractionary B) increase; expansionary C) increase; contractionary D) decrease; expansionary Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 27) A borrowed reserves target is ________ because increases in income ________ interest rates and discount loans, causing the Fed to ________ the monetary base, everything else held constant. A) procyclical; increase; increase B) countercyclical; increase; increase C) procyclical; reduce; reduce D) countercyclical; reduce; reduce Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 28) Fed policy since the early 1990s indicates that it is pursuing a policy of targeting the A) monetary base. B) money supply. C) federal funds interest rate. D) exchange rate. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 29) Since the early 1990s, the Fed has conducted monetary policy by setting a target for the A) level of borrowed reserves. B) monetary base. C) federal funds rate. D) inflation rate. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking

30) The Fed can engage in preemptive strikes against a rise in inflation by ________ the federal funds interest rate; it can act preemptively against negative demand shocks by ________ the federal funds interest rate. A) raising; lowering B) raising; raising C) lowering; lowering D) lowering; raising Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 31) International policy coordination refers to A) central banks in major nations acting without regard to the global consequences of their policies. B) central banks in major nations pursuing only domestic objectives. C) central banks adopting policies in pursuit of joint objectives. D) central banks all adopting identical policies. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 32) The Federal Reserve has been ________ preemptive because of the changing view that monetary policy has to be ________ looking. A) more; forward B) more; backward C) less; forward D) less; backward Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking

Economics of Money, Banking, and Financial Markets, 12e (Mishkin) Chapter 17 The Foreign Exchange Market 17.1 Foreign Exchange Market 1) The exchange rate is A) the price of one currency relative to gold. B) the value of a currency relative to inflation. C) the change in the value of money over time. D) the price of one currency relative to another. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 2) Exchange rates are determined in A) the money market. B) the foreign exchange market. C) the stock market. D) the capital market. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 3) Although foreign exchange market trades are said to involve the buying and selling of currencies, most trades involve the buying and selling of A) bank deposits denominated in different currencies. B) SDRs. C) gold. D) ECUs. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 4) The immediate (two-day) exchange of one currency for another is a A) forward transaction. B) spot transaction. C) money transaction. D) exchange transaction. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking

5) An agreement to exchange dollar bank deposits for euro bank deposits in one month is a A) spot transaction. B) future transaction. C) forward transaction. D) deposit transaction. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 6) If 1 euro can be purchased for $1.10 today on the market, this exchange rate is called the A) spot exchange rate. B) forward exchange rate. C) fixed exchange rate. D) financial exchange rate. Answer: A Ques Status: Revised AACSB: Reflective Thinking 7) In an agreement to exchange dollars for euros in three months at a price of $0.90 per euro, the price is the A) spot exchange rate. B) money exchange rate. C) forward exchange rate. D) fixed exchange rate. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 8) When the value of the British pound changes from $1.25 to $1.50, the pound has ________ and the U.S. dollar has ________. A) appreciated; appreciated B) depreciated; appreciated C) appreciated; depreciated D) depreciated; depreciated Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 9) When the value of the British pound changes from $1.50 to $1.25, then the pound has ________ and the U.S. dollar has ________. A) appreciated; appreciated B) depreciated; appreciated C) appreciated; depreciated D) depreciated; depreciated Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 2 Copyright © 2019 Pearson Education, Inc.

10) When the value of the dollar changes from £0.5 to £0.75, then the British pound has ________ and the U.S. dollar has ________. A) appreciated; appreciated B) depreciated; appreciated C) appreciated; depreciated D) depreciated; depreciated Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 11) When the value of the dollar changes from £0.75 to £0.5, then the British pound has ________ and the U.S. dollar has ________. A) appreciated; appreciated B) depreciated; appreciated C) appreciated; depreciated D) depreciated; depreciated Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 12) When the exchange rate for the Mexican peso changes from 9 pesos to the U.S. dollar to 10 pesos to the U.S. dollar, then the Mexican peso has ________ and the U.S. dollar has ________. A) appreciated; appreciated B) depreciated; appreciated C) appreciated; depreciated D) depreciated; depreciated Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 13) When the exchange rate for the Mexican peso changes from 10 pesos to the U.S dollar to 9 pesos to the U.S. dollar, then the Mexican peso has ________ and the U.S. dollar has ________. A) appreciated; appreciated B) depreciated; appreciated C) appreciated; depreciated D) depreciated; depreciated Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking

14) If one U.S. dollar is traded on the foreign exchange market for about 0.89 euros, then one euro can purchase about ________ U.S. dollars. A) 0.75 B) 0.89 C) 1.12 D) 1.75 Answer: C Ques Status: Revised AACSB: Analytical Thinking 15) If one U.S. dollar is traded on the foreign exchange market for about 49.0 Indian rupees, then one Indian rupee can purchase about ________ U.S. dollars. A) 0.02 B) 1.20 C) 7.00 D) 49.0 Answer: A Ques Status: Revised AACSB: Analytical Thinking 16) If one U.S. dollar is traded on the foreign exchange market for about 1.15 Swiss francs, then one Swiss franc can purchase about ________ U.S. dollars. A) 0.30 B) 0.87 C) 1.15 D) 3.10 Answer: B Ques Status: Revised AACSB: Analytical Thinking 17) If one U.S. dollar is traded on the foreign exchange market for about 3.33 Romanian new lei, then one Romanian new lei can purchase about ________ U.S. dollars. A) 0.30 B) 1.86 C) 2.86 D) 3.33 Answer: A Ques Status: Revised AACSB: Analytical Thinking

18) If the U.S. dollar appreciates from 1.25 Swiss franc per U.S. dollar to 1.5 francs per dollar, then the franc depreciates from ________ U.S. dollars per franc to ________ U.S. dollars per franc. A) 0.80; 0.67 B) 0.67; 0.80 C) 0.50; 0.33 D) 0.33; 0.50 Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 19) If the British pound appreciates from $0.50 per pound to $0.75 per pound, the U.S. dollar depreciates from ________ per dollar to ________ per dollar. A) £2; £2.5 B) £2; £1.33 C) £2; £1.5 D) £2; £1.25 Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 20) If the Japanese yen appreciates from $0.01 per yen to $0.02 per yen, the U.S. dollar depreciates from ________ per dollar to ________ per dollar. A) 100¥; 50¥ B) 10¥; 5¥ C) 5¥; 10¥ D) 50¥; 100¥ Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 21) If the dollar appreciates from 1.5 Brazilian reals per dollar to 2.0 reals per dollar, the real depreciates from ________ per real to ________ per real. A) $0.67; $0.50 B) $0.33; $0.50 C) $0.75; $0.50 D) $0.50; $0.67 E) $0.50; $0.75 Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking

22) When the exchange rate for the British pound changes from $1.80 per pound to $1.60 per pound, then, holding everything else constant, the pound has ________ and ________ expensive. A) appreciated; British cars sold in the United States become more B) appreciated; British cars sold in the United States become less C) depreciated; American wheat sold in Britain becomes more D) depreciated; American wheat sold in Britain becomes less Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 23) If the dollar depreciates relative to the Swiss franc A) Swiss chocolate will become cheaper in the United States. B) American computers will become more expensive in Switzerland. C) Swiss chocolate will become more expensive in the United States. D) Swiss computers will become cheaper in the United States. Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 24) Everything else held constant, when a country's currency appreciates, the country's goods abroad become ________ expensive and foreign goods in that country become ________ expensive. A) more; less B) more; more C) less; less D) less; more Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 25) Everything else held constant, when a country's currency depreciates, its goods abroad become ________ expensive while foreign goods in that country become ________ expensive. A) more; less B) more; more C) less; less D) less; more Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking

17.2 Exchange Rates in the Long Run 1) According to the Purchasing Power Parity, if one country's price level rises relative to another's by a certain percentage, then the other country's currency A) maintains its value. B) depreciates by the same percentage. C) appreciates by the same percentage. D) lose its value. Answer: C Ques Status: New AACSB: Analytical Thinking 2) The real exchange rate between U.S. dollars and the Japanese yens is the price of U.S. goods relative to the price of Japanese goods denominated in the U.S. dollar. If this real exchange rate is below one, the same basket of goods is ________ in the United States than in Japan, and the purchasing power of the U.S. dollars is ________ than the Japanese yens. A) more expensive; higher B) cheaper; lower C) more expensive; lower D) cheaper; higher Answer: B Ques Status: New AACSB: Analytical Thinking 3) The real exchange rate between U.S. dollars and the Japanese yens is the price of U.S. goods relative to the price of Japanese goods denominated in the U.S. dollar. If it is below one, the same basket of goods is ________ in the United States than in Japan, and the purchasing power of the U.S. dollars is ________ than the Japanese yens. A) more expensive; higher B) cheaper; lower C) more expensive; lower D) cheaper; higher Answer: B Ques Status: New AACSB: Reflective Thinking 4) The ________ states that exchange rates between any two currencies will adjust to reflect changes in the price levels of the two countries. A) theory of purchasing power parity B) law of one price C) theory of money neutrality D) quantity theory of money Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking

5) The theory of PPP suggests that if one country's price level rises relative to another's, its currency should A) depreciate. B) appreciate. C) float. D) do none of the above. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 6) The theory of PPP suggests that if one country's price level falls relative to another's, its currency should A) depreciate. B) appreciate. C) float. D) do none of the above. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 7) The theory of PPP suggests that if one country's price level falls relative to another's, its currency should A) depreciate in the long run. B) appreciate in the long run. C) appreciate in the short run. D) depreciate in the short run. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 8) The theory of purchasing power parity cannot fully explain exchange rate movements in the short run because A) all goods are identical even if produced in different countries. B) monetary policy differs across countries. C) some goods are not traded between countries. D) fiscal policy differs across countries. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking

9) The theory of purchasing power parity states that exchange rates between any two currencies will adjust to reflect changes in A) the trade balances of the two countries. B) the current account balances of the two countries. C) fiscal policies of the two countries. D) the price levels of the two countries. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 10) If the real exchange rate between the United States and Japan is ________, then it is cheaper to buy goods in Japan than in the United States. A) greater than 1.0 B) greater than 0.5 C) less than 0.5 D) less than 1.0 Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 11) According to PPP, when the Big Mac has a high price in terms of local currency, then the exchange rate quoted in U.S. dollars per unit of local currency should be ________. A) low B) high C) uncertain D) one Answer: A Ques Status: New AACSB: Reflective Thinking 12) When a country's goods and services are expensive relative to other countries', we say that its currency is ________ in terms of purchasing power parity. A) overvalued B) undervalued C) rational D) irrational Answer: A Ques Status: New AACSB: Reflective Thinking

13) According to PPP, the real exchange rate between two countries will always equal A) 0.0. B) 0.5. C) 1.0. D) 1.5. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 14) The theory of PPP suggests that if one country's price level rises relative to another's, its currency should A) depreciate in the long run. B) appreciate in the long run. C) depreciate in the short run. D) appreciate in the short run. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 15) In the long run, a rise in a country's price level (relative to the foreign price level) causes its currency to ________, while a fall in the country's relative price level causes its currency to ________. A) appreciate; appreciate B) appreciate; depreciate C) depreciate; appreciate D) depreciate; depreciate Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 16) If the 2005 inflation rate in Canada is 4 percent, and the inflation rate in Mexico is 2 percent, then the theory of purchasing power parity predicts that, during 2005, the value of the Canadian dollar in terms of Mexican pesos will A) rise by 6 percent. B) rise by 2 percent. C) fall by 6 percent. D) fall by 2 percent. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking

17) Assume that the following are the predicted inflation rates in these countries for the year: 2% for the United States, 3% for Canada; 4% for Mexico, and 5% for Brazil. According to the purchasing power parity and everything else held constant, which of the following would we expect to happen? A) The Brazilian real will depreciate against the U.S. dollar. B) The Mexican peso will depreciate against the Brazilian real. C) The Canadian dollar will depreciate against the Mexican peso. D) The U.S. dollar will depreciate against the Canadian dollar. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 18) According to the purchasing power parity theory, a rise in the United States price level of 5 percent, and a rise in the Mexican price level of 6 percent cause A) the dollar to appreciate 1 percent relative to the peso. B) the dollar to depreciate 1 percent relative to the peso. C) the dollar to depreciate 5 percent relative to the peso. D) the dollar to appreciate 5 percent relative to the peso. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 19) Higher tariffs and quotas cause a country's currency to ________ in the ________ run, everything else held constant. A) depreciate; short B) appreciate; short C) depreciate; long D) appreciate; long Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 20) Lower tariffs and quotas cause a country's currency to ________ in the ________ run, everything else held constant. A) depreciate; short B) appreciate; short C) depreciate; long D) appreciate; long Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking

21) Anything that increases the demand for foreign goods relative to domestic goods tends to ________ the domestic currency because domestic goods will only continue to sell well if the value of the domestic currency is ________, everything else held constant. A) depreciate; lower B) depreciate; higher C) appreciate; lower D) appreciate; higher Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 22) Everything else held constant, increased demand for a country's ________ causes its currency to appreciate in the long run, while increased demand for ________ causes its currency to depreciate. A) imports; imports B) imports; exports C) exports; imports D) exports; exports Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 23) Everything else held constant, increased demand for a country's exports causes its currency to ________ in the long run, while increased demand for imports causes its currency to ________. A) appreciate; appreciate B) appreciate; depreciate C) depreciate; appreciate D) depreciate; depreciate Answer: B Ques Status: Previous Edition AACSB: Interpersonal Relations and Teamwork 24) Everything else held constant, if a factor increases the demand for ________ goods relative to ________ goods, the domestic currency will appreciate. A) foreign; domestic B) foreign; foreign C) domestic; domestic D) domestic; foreign Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking

25) Everything else held constant, if a factor decreases the demand for ________ goods relative to ________ goods, the domestic currency will depreciate. A) foreign; domestic B) foreign; foreign C) domestic; domestic D) domestic; foreign Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 26) An increase in productivity in a country will cause its currency to ________ because it can produce goods at a ________ price, everything else held constant. A) depreciate; lower B) appreciate; lower C) depreciate; higher D) appreciate; higher Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 27) If, in retaliation for "unfair" trade practices, Congress imposes a 30 percent tariff on Japanese DVD recorders, but at the same time, U.S. demand for Japanese goods increases, then, in the long run, ________, everything else held constant. A) the Japanese yen should appreciate relative to the U.S. dollar B) the Japanese yen should depreciate relative to the U.S. dollar C) there is no effect on the Japanese yen relative to the U.S. dollar D) the Japanese yen could appreciate, depreciate or remain constant relative to the U.S. dollar Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 28) If the U.S. Congress imposes a quota on imports of Japanese cars due to claims of "unfair" trade practices, and Japanese demand for American exports increases at the same time, then, in the long run ________, everything else held constant. A) the Japanese yen will appreciate relative to the U.S. dollar B) the Japanese yen will depreciate relative to the U.S. dollar C) the Japanese yen will either appreciate, depreciate or remain constant against the U.S. dollar D) there will be no effect on the Japanese yen relative to the U.S. dollar Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking

29) If the inflation rate in the United States is higher than that in Mexico and productivity is growing at a slower rate in the United States than in Mexico, then, in the long run, ________, everything else held constant. A) the Mexican peso will appreciate relative to the U.S. dollar B) the Mexican peso will depreciate relative to the U.S. dollar C) the Mexican peso will either appreciate, depreciate, or remain constant relative to the U.S. dollar D) there will be no effect on the Mexican peso relative to the U.S. dollar Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 30) If the Brazilian demand for American exports rises at the same time that U.S. productivity rises relative to Brazilian productivity, then, in the long run, ________, everything else held constant. A) the Brazilian real will appreciate relative to the U.S. dollar B) the Brazilian real will depreciate relative to the U.S. dollar C) the Brazilian real will either appreciate, depreciate, or remain constant relative to the U.S. dollar D) there is no effect on the Brazilian real relative to the U.S. dollar Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 31) Explain the law of one price and the theory of purchasing power parity. Why doesn't purchasing power parity explain all exchange rate movements in the short run? What factors determine long-run exchange rates? Answer: With no trade barriers and low transport costs, the law of one price states that the price of traded goods should be the same in all countries. The purchasing power parity theory extends the law of one price to total economies. PPP states that exchange rates should adjust to reflect changes in the price levels between two countries. PPP may fail to fully explain exchange rates because goods are not identical, and price levels include traded and nontraded goods and services. Long-run exchange rates are determined by domestic price levels relative to foreign price levels, trade barriers, import and export demand, and productivity. Ques Status: Previous Edition AACSB: Reflective Thinking

17.3 Exchange Rates in the Short Run: A Supply and Demand Analysis 1) The theory of portfolio choice suggests that the most important factor affecting the demand for domestic and foreign assets is A) the level of trade and capital flows. B) the expected return on these assets relative to one another. C) the liquidity of these assets relative to one another. D) the riskiness of these assets relative to one another. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 2) The ________ suggests that the most important factor affecting the demand for domestic and foreign assets is the expected return on domestic assets relative to foreign assets. A) theory of portfolio choice B) law of one price C) interest parity condition D) theory of foreign capital mobility Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 3) The theory of portfolio choice suggests that the most important factor affecting the demand for domestic and foreign assets is the ________ on these assets relative to one another. A) interest rate B) risk C) expected return D) liquidity Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 4) As the relative expected return on dollar assets increases, foreigners will want to hold more ________ assets and less ________ assets, everything else held constant. A) foreign; foreign B) foreign; dollar C) dollar; foreign D) dollar; dollar Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking

5) When Americans or foreigners expect the return on ________ assets to be high relative to the return on ________ assets, there is a higher demand for dollar assets and a correspondingly lower demand for foreign assets. A) dollar; dollar B) dollar; foreign C) foreign; dollar D) foreign; foreign Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 6) When Americans or foreigners expect the return on ________ assets to be high relative to the return on ________ assets, there is a ________ demand for dollar assets, everything else held constant. A) dollar; foreign; constant B) dollar; foreign; higher C) foreign; dollar; higher D) foreign; dollar; constant Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 7) When Americans or foreigners expect the return on dollar assets to be high relative to the return on foreign assets, there is a ________ demand for dollar assets and a correspondingly ________ demand for foreign assets. A) higher; higher B) higher; lower C) lower; higher D) lower; lower Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 8) Everything else held constant, when the current value of the domestic currency increases, the ________ domestic assets ________. A) demand for; increases B) quantity demanded of; increases C) demand for; decreases D) quantity demanded of; decreases Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking

9) Everything else held constant, when the current value of the domestic exchange rate increases, the ________ of domestic assets ________. A) quantity supplied; does not change B) supply; decreases C) quantity supplied; increases D) supply; increases Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 17.4 Explaining Changes in Exchange Rates 1) An increase in the domestic interest rate causes the demand for domestic assets to ________ and the domestic currency to ________, everything else held constant. A) increase; appreciate B) increase; depreciate C) decrease; appreciate D) decrease; depreciate Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 2) An increase in the domestic interest rate causes the demand for domestic assets to shift to the ________ and the domestic currency to ________, everything else held constant. A) right; appreciate B) right; depreciate C) left; appreciate D) left; depreciate Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 3) A decrease in the domestic interest rate causes the demand for domestic assets to ________ and the domestic currency to ________, everything else held constant. A) increase; appreciate B) increase; depreciate C) decrease; appreciate D) decrease; depreciate Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking

4) A decrease in the domestic interest rate causes the demand for domestic assets to shift to the ________ and the domestic currency to ________, everything else held constant. A) right; appreciate B) right; depreciate C) left; appreciate D) left; depreciate Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 5) ________ in the domestic interest rate causes the demand for domestic assets to increase and the domestic currency to ________, everything else held constant. A) An increase; appreciate B) An increase; depreciate C) A decrease; appreciate D) A decrease; depreciate Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 6) ________ in the domestic interest rate causes the demand for domestic assets to shift to the right and the domestic currency to ________, everything else held constant. A) An increase; appreciate B) An increase; depreciate C) A decrease; appreciate D) A decrease; depreciate Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 7) ________ in the domestic interest rate causes the demand for domestic assets to decrease and the domestic currency to ________, everything else held constant. A) An increase; appreciate B) An increase; depreciate C) A decrease; appreciate D) A decrease; depreciate Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking

8) ________ in the domestic interest rate causes the demand for domestic assets to shift to the left and the domestic currency to ________, everything else held constant. A) An increase; appreciate B) An increase; depreciate C) A decrease; appreciate D) A decrease; depreciate Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 9) ________ in the domestic interest rate causes the demand for domestic assets to ________ and the domestic currency to appreciate, everything else held constant. A) An increase; increase B) An increase; decrease C) A decrease; increase D) A decrease; decrease Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 10) ________ in the domestic interest rate causes the demand for domestic assets to shift to the ________ and the domestic currency to appreciate, everything else held constant. A) An increase; right B) An increase; left C) A decrease; right D) A decrease; left Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 11) ________ in the domestic interest rate causes the demand for domestic assets to ________ and the domestic currency to depreciate, everything else held constant. A) An increase; increase B) An increase; decrease C) A decrease; increase D) A decrease; decrease Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking

12) ________ in the domestic interest rate causes the demand for domestic assets to shift to the ________ and the domestic currency to depreciate, everything else held constant. A) An increase; right B) An increase; left C) A decrease; right D) A decrease; left Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 13) Suppose that the Federal Reserve enacts expansionary policy. Everything else held constant, this will cause the demand for U.S. assets to ________ and the U.S. dollar to ________. A) increase; appreciate B) decrease; appreciate C) increase; depreciate D) decrease; depreciate Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 14) Suppose that the Federal Reserve conducts an open market sale. Everything else held constant, this will cause the demand for U.S. assets to ________ and the U.S. dollar will ________. A) increase; appreciate B) increase; depreciate C) decrease; appreciate D) decrease; depreciate Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 15) An increase in the foreign interest rate causes the demand for domestic assets to ________ and the domestic currency to ________, everything else held constant. A) increase; appreciate B) increase; depreciate C) decrease; appreciate D) decrease; depreciate Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking

16) An increase in the foreign interest rate causes the demand for domestic assets to shift to the ________ and the domestic currency to ________, everything else held constant. A) right; appreciate B) right; depreciate C) left; appreciate D) left; depreciate Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 17) A decrease in the foreign interest rate causes the demand for domestic assets to ________ and the domestic currency to ________, everything else held constant. A) increase; appreciate B) increase; depreciate C) decrease; appreciate D) decrease; depreciate Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 18) A decrease in the foreign interest rate causes the demand for domestic assets to shift to the ________ and the domestic currency to ________, everything else held constant. A) right; appreciate B) right; depreciate C) left; appreciate D) left; depreciate Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 19) ________ in the foreign interest rate causes the demand for domestic assets to increase and the domestic currency to ________, everything else held constant. A) An increase; appreciate B) An increase; depreciate C) A decrease; appreciate D) A decrease; depreciate Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking

20) ________ in the foreign interest rate causes the demand for domestic assets to shift to the right and the domestic currency to ________, everything else held constant. A) An increase; appreciate B) An increase; depreciate C) A decrease; appreciate D) A decrease; depreciate Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 21) ________ in the foreign interest rate causes the demand for domestic assets to decrease and the domestic currency to ________, everything else held constant. A) An increase; appreciate B) An increase; depreciate C) A decrease; appreciate D) A decrease; depreciate Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 22) ________ in the foreign interest rate causes the demand for domestic assets to shift to the left and the domestic currency to ________, everything else held constant. A) An increase; appreciate B) An increase; depreciate C) A decrease; appreciate D) A decrease; depreciate Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 23) ________ in the foreign interest rate causes the demand for domestic assets to ________ and the domestic currency to appreciate, everything else held constant. A) An increase; increase B) An increase; decrease C) A decrease; increase D) A decrease; decrease Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking

24) ________ in the foreign interest rate causes the demand for domestic assets to shift to the ________ and the domestic currency to appreciate, everything else held constant. A) An increase; right B) An increase; left C) A decrease; right D) A decrease; left Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 25) ________ in the foreign interest rate causes the demand for domestic assets to ________ and the domestic currency to depreciate, everything else held constant. A) An increase; increase B) An increase; decrease C) A decrease; increase D) A decrease; decrease Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 26) ________ in the foreign interest rate causes the demand for domestic assets to shift to the ________ and the domestic currency to depreciate, everything else held constant. A) An increase; right B) An increase; left C) A decrease; right D) A decrease; left Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 27) Suppose that the European Central Bank enacts expansionary policy. Everything else held constant, this will cause the demand for U.S. assets to ________ and the U.S. dollar to ________. A) increase; appreciate B) decrease; appreciate C) increase; depreciate D) decrease; depreciate Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking

28) Suppose that the European Central Bank conducts a main refinancing sale. Everything else held constant, this would cause the demand for U.S. assets to ________ and the U.S. dollar will ________. A) increase; appreciate B) increase; depreciate C) decrease; appreciate D) decrease; depreciate Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 29) An increase in the expected future domestic exchange rate causes the demand for domestic assets to ________ and the domestic currency to ________, everything else held constant. A) increase; appreciate B) increase; depreciate C) decrease; appreciate D) decrease; depreciate Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 30) An increase in the expected future domestic exchange rate causes the demand for domestic assets to shift to the ________ and the domestic currency to ________, everything else held constant. A) right; appreciate B) right; depreciate C) left; appreciate D) left; depreciate Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 31) A decrease in the expected future domestic exchange rate causes the demand for domestic assets to ________ and the domestic currency to ________, everything else held constant. A) increase; appreciate B) increase; depreciate C) decrease; appreciate D) decrease; depreciate Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking

32) A decrease in the expected future domestic exchange rate causes the demand for domestic assets to shift to the ________ and the domestic currency to ________, everything else held constant. A) right; appreciate B) right; depreciate C) left; appreciate D) left; depreciate Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 33) ________ in the expected future domestic exchange rate causes the demand for domestic assets to increase and the domestic currency to ________, everything else held constant. A) An increase; appreciate B) An increase; depreciate C) A decrease; appreciate D) A decrease; depreciate Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 34) ________ in the expected future domestic exchange rate causes the demand for domestic assets to shift to the right and the domestic currency to ________, everything else held constant. A) An increase; appreciate B) An increase; depreciate C) A decrease; appreciate D) A decrease; depreciate Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 35) ________ in the expected future domestic exchange rate causes the demand for domestic assets to decrease and the domestic currency to ________, everything else held constant. A) An increase; appreciate B) An increase; depreciate C) A decrease; appreciate D) A decrease; depreciate Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking

36) ________ in the expected future domestic exchange rate causes the demand for domestic assets to shift to the left and the domestic currency to ________, everything else held constant. A) An increase; appreciate B) An increase; depreciate C) A decrease; appreciate D) A decrease; depreciate Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 37) ________ in the expected future domestic exchange rate causes the demand for domestic assets to ________ and the domestic currency to appreciate, everything else held constant. A) An increase; increase B) An increase; decrease C) A decrease; increase D) A decrease; decrease Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 38) ________ in the expected future domestic exchange rate causes the demand for domestic assets to shift to the ________ and the domestic currency to appreciate, everything else held constant. A) An increase; right B) An increase; left C) A decrease; right D) A decrease; left Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 39) ________ in the expected future domestic exchange rate causes the demand for domestic assets to ________ and the domestic currency to depreciate, everything else held constant. A) An increase; increase B) An increase; decrease C) A decrease; increase D) A decrease; decrease Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking

40) ________ in the expected future domestic exchange rate causes the demand for domestic assets to shift to the ________ and the domestic currency to depreciate, everything else held constant. A) An increase; right B) An increase; left C) A decrease; right D) A decrease; left Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 41) Suppose the Federal Reserve releases a policy statement today which leads people to believe that the Fed will be enacting expansionary monetary policy in the near future. Everything else held constant, the release of this statement would immediately cause the demand for U.S. assets to ________ and the U.S. dollar to ________. A) increase; appreciate B) decrease; appreciate C) increase; depreciate D) decrease; depreciate Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 42) Suppose a report was released today that showed the Euro-Zone inflation rate is running above the European Central Bank's inflation rate target. This leads people to expect that the European Central Bank will enact contractionary policy in the near future. Everything else held constant, the release of this report would immediately cause the demand for U.S. assets to ________ and the U.S. dollar will ________. A) increase; appreciate B) increase; depreciate C) decrease; appreciate D) decrease; depreciate Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 43) Suppose that the latest Consumer Price Index (CPI) release shows a higher inflation rate in the U.S. than was expected. Everything else held constant, the release of the CPI report would immediately cause the demand for U.S. assets to ________ and the U.S. dollar would ________. A) increase; appreciate B) increase; depreciate C) decrease; appreciate D) decrease; depreciate Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 27 Copyright © 2019 Pearson Education, Inc.

44) When domestic real interest rates rise, the domestic currency ________. A) appreciates B) depreciates C) appreciates or depreciates depending on the change in nominal interest rates D) does not change Answer: A Ques Status: New AACSB: Analytical Thinking 45) During the beginning on the global financial crisis in the United States when the effects of the crisis were mostly confined within the United States, the U. S. dollar ________ because demand for U.S. assets ________. A) appreciated; increased B) depreciated; increased C) appreciated; decreased D) depreciated; decreased Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 46) When the effects of the global financial crisis started to spread more quickly throughout the rest of the world, the U.S. dollar ________ because demand for U.S. assets ________. A) appreciated; increased B) depreciated; increased C) appreciated; decreased D) depreciated; decreased Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 47) The Brexit vote in June 2016 resulted in higher expected trade barriers . Therefore, the expected value of the pound would be ________ in the future. The result was the sharp ________ in the equilibrium exchange rate for the British pound. A) lower; fall B) higher; fall C) lower; rise D) higher; rise Answer: A Ques Status: New AACSB: Analytical Thinking

48) The Brexit vote in June 2016 resulted in higher expected trade barriers. The relative expected return on British (pound) assets therefore ________ and so the quantity demanded of pound assets ________ at any given exchange rate, shifting the demand curve for pound assets to the ________. A) fell; declined; left B) fell; increased; right C) fell; declined; right D) rose; declined; left E) rose; increased; left Answer: A Ques Status: New AACSB: Analytical Thinking 49) Explain and show graphically the effect of an increase in the expected future exchange rate on the equilibrium exchange rate, everything else held constant. Answer: See figure below.

When the expected future exchange rate increases, the relative expected return on the domestic assets increases. This will cause the demand for domestic assets to increase and the current value of the exchange rate will appreciate. Ques Status: Previous Edition AACSB: Analytical Thinking

50) Explain and show graphically the effect of an increase in the expected inflation rate on the equilibrium exchange rate, everything else held constant. Answer: See figure below.

When the expected inflation rate increases, the relative expected return on domestic assets is affected two ways. First, through the Fisher effect, the domestic nominal interest rate will increase the expected return on domestic assets. Second, through purchasing power parity, the future value of the domestic exchange rate will decline which will decrease the expected return on domestic assets. Since it is generally believed that the effect of the change in the expected future value of the domestic exchange rate is larger than the Fisher effect, the net effect is a lower expected return on domestic assets. This will decrease the demand for domestic assets, which will cause the current value of the domestic exchange rate to depreciate. Ques Status: Previous Edition AACSB: Analytical Thinking

17.5 Appendix: The Interest Parity Condition 1) The condition that states that the domestic interest rate equals the foreign interest rate minus the expected appreciation of the domestic currency is called A) the purchasing power parity condition. B) the interest parity condition. C) money neutrality. D) the theory of foreign capital mobility. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 2) If the interest rate is 7 percent on euro-denominated assets and 5 percent on dollardenominated assets, and if the dollar is expected to appreciate at a 4 percent rate, for Francois the Frenchman the expected rate of return on dollar-denominated assets is A) 11 percent. B) 9 percent. C) 5 percent. D) 3 percent. E) 1 percent. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 3) If the interest rate is 7 percent on euro-denominated assets and 5 percent on dollardenominated assets, and if the dollar is expected to appreciate at a 4 percent rate, the expected return on ________-denominated assets in ________ percent. A) dollar; euros is 3 B) euro; dollars is 1 C) dollar; euros is 1 D) euro; dollars is 3 Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 4) If the interest rate is 7 percent on euro-denominated assets and 5 percent on dollardenominated assets, and if the dollar is expected to appreciate at a 4 percent rate, the expected return on ________-denominated assets in terms of ________ percent. A) dollar; euros is 3 B) euro; dollars is 1 C) dollar; euros is 9 D) euro; dollars is 11 Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking

5) If the interest rate is 7 percent on euro-denominated assets and 5 percent on dollardenominated assets, and if the dollar is expected to appreciate at a 4 percent rate, the expected return on ________-denominated assets in terms of ________ percent. A) dollar; dollars is 7 B) euro; dollars is 1 C) dollar; euros is 1 D) euro; euros is 7 Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 6) If the interest rate on euro-denominated assets is 13 percent and it is 15 percent on pesodenominated assets, and if the euro is expected to appreciate at a 4 percent rate, for Manuel the Mexican the expected rate of return on euro-denominated assets is A) 11 percent. B) 13 percent. C) 17 percent. D) 19 percent. Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 7) If the interest rate on euro-denominated assets is 13 percent and it is 15 percent on pesodenominated assets, and if the euro is expected to appreciate at a 4 percent rate, for Francois the Frenchman the expected rate of return on peso-denominated assets is A) 11 percent. B) 15 percent. C) 17 percent. D) 19 percent. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 8) With a 10 percent interest rate on dollar deposits, and an expected appreciation of 7 percent over the coming year, the expected return on dollar deposits in terms of the foreign currency is A) 3 percent. B) 10 percent. C) 13.5 percent. D) 17 percent. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking

9) With a 10 percent interest rate on dollar deposits, and an expected appreciation of 7 percent over the coming year, the expected return on dollar deposits in terms of the dollar is A) 3 percent. B) 10 percent. C) 13.5 percent. D) 17 percent. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 10) The expected return on dollar deposits in terms of foreign currency can be written as the ________ of the interest rate on dollar deposits and the expected appreciation of the dollar. A) product B) ratio C) sum D) difference Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 11) In a world with few impediments to capital mobility, the domestic interest rate equals the sum of the foreign interest rate and the expected depreciation of the domestic currency, a situation known as the A) interest parity condition. B) purchasing power parity condition. C) exchange rate parity condition. D) foreign asset parity condition. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 12) According to the interest parity condition, if the domestic interest rate is 12 percent and the foreign interest rate is 10 percent, then the expected ________ of the foreign currency must be ________ percent. A) appreciation; 4 B) appreciation; 2 C) depreciation; 2 D) depreciation; 4 Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking

13) According to the interest parity condition, if the domestic interest rate is 10 percent and the foreign interest rate is 12 percent, then the expected ________ of the foreign currency must be ________ percent. A) appreciation; 4 B) appreciation; 2 C) depreciation; 2 D) depreciation; 4 Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 14) If the exchange rate at time t is Et = €1/$. You invest $1 in an euro asset at t, which has an interest of 8%. If Et+1 = €1.02/$, then your rate of return in terms of $ is ________%, and your rate of return in terms of € is ________%. A) 6; 8 B) 8; 6 C) 8;2 D) 2; 8 Answer: A Ques Status: New AACSB: Analytical Thinking 15) If the exchange at time t is Et = €1.2/$. You invest $1 in an euro asset at t, which has an interest of 8%. When the asset expires at t+1, you get paid €________. If Et+1 = €1.02/$, then your rate of return in terms of € is ________%. A) 1.3; 8 B) 1.3; 6 C) 1.08;6 D) 1.08; 8 Answer: A Ques Status: New AACSB: Analytical Thinking 16) If the exchange at time t is Et = €1/$. You invest $1 in an euro asset at t, which has an interest of 8%. When the asset expires at t+1, you get paid €________. If Et+1 = €1.02/$, then you can buy back $________. A) 1.08; 1.06 B) 1; 1.06 C) 1.08; 1.02 D) 1.06; 1.08 Answer: A Ques Status: New AACSB: Analytical Thinking

17) According to the interest parity condition, if the domestic interest rate is 12 percent and the foreign currency is expected to depreciate by 2% against domestic currency. Then the foreign asset must offer an interest rate of ________%. A) 14 B) 12 C) 10 D) 8 Answer: A Ques Status: New AACSB: Analytical Thinking 18) According to the interest parity condition, if the U.S. interest rate is 2 percent and the Japanese interest rate is 4%, and the current exchange rate is 100 yens per dollar. Then the market expects the future exchange rate to be ________ yens per dollar. A) 102 B) 1.02 C) 98 D) 0.98 Answer: A Ques Status: New AACSB: Analytical Thinking

Economics of Money, Banking, and Financial Markets, 12e (Mishkin) Chapter 18 The International Financial System 18.1 Intervention in the Foreign Exchange Market 1) A central bank ________ of domestic currency and corresponding ________ of foreign assets in the foreign exchange market leads to an equal decline in its international reserves and the monetary base, everything else held constant. A) sale; purchase B) sale; sale C) purchase; sale D) purchase; purchase Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 2) A central bank ________ of domestic currency and corresponding ________ of foreign assets in the foreign exchange market leads to an equal increase in its international reserves and the monetary base, everything else held constant. A) sale; purchase B) sale; sale C) purchase; sale D) purchase; purchase Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 3) Suppose that the Bank of Japan buys U.S. dollar assets with yen-denominated assets. Everything else held constant, this transaction will cause ________ in the foreign assets held by the Federal Reserve and ________ in the U.S. monetary base. A) an increase; an increase B) an increase; a decrease C) a decrease; an increase D) a decrease; a decrease Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking

4) Suppose that the Bank of Japan buys yen-denominated assets with U.S. dollar assets. Everything else held constant, this transaction will cause ________ in the foreign assets held by the Federal Reserve and ________ in the U.S. monetary base. A) an increase; an increase B) an increase; a decrease C) a decrease; an increase D) a decrease; a decrease Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 5) When the central bank allows the purchase or sale of domestic currency to have an effect on the monetary base, it is called A) an unsterilized foreign exchange intervention. B) a sterilized foreign exchange intervention. C) an exchange rate feedback rule. D) a money neutral foreign exchange intervention. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 6) A foreign exchange intervention with an offsetting open market operation that leaves the monetary base unchanged is called A) an unsterilized foreign exchange intervention. B) a sterilized foreign exchange intervention. C) an exchange rate feedback rule. D) a money neutral foreign exchange intervention. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 7) Everything else held constant, if a central bank makes an unsterilized purchase of foreign assets, then the domestic money supply will ________ and the domestic currency will ________. A) increase; appreciate B) increase; depreciate C) decrease; appreciate D) decrease; depreciate Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking

8) Everything else held constant, if a central bank makes an unsterilized ________ of foreign assets, then the domestic money supply will increase and the domestic currency will ________. A) purchase; appreciate B) purchase; depreciate C) sale; appreciate D) sale; depreciate Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 9) Everything else held constant, if a central bank makes an unsterilized ________ of foreign assets, then the domestic money supply will ________ and the domestic currency will appreciate. A) purchase; increase B) purchase; decrease C) sale; increase D) sale; decrease Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 10) Everything else held constant, if a central bank makes an unsterilized sale of foreign assets, then the domestic money supply will ________ and the domestic currency will ________. A) increase; appreciate B) increase; depreciate C) decrease; appreciate D) decrease; depreciate Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 11) Everything else held constant, if a central bank makes an unsterilized ________ of foreign assets, then the domestic money supply will decrease and the domestic currency will ________. A) purchase; appreciate B) purchase; depreciate C) sale; appreciate D) sale; depreciate Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking

12) Everything else held constant, if a central bank makes an unsterilized ________ of foreign assets, then the domestic money supply will ________ and the domestic currency will depreciate. A) purchase; increase B) purchase; decrease C) sale; increase D) sale; decrease Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 13) Everything else held constant, if a central bank makes a sterilized purchase of foreign assets, then the domestic currency will A) appreciate. B) depreciate. C) either appreciate, depreciate, or remain constant. D) not be affected. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 14) Because sterilized interventions mean offsetting open market operations, there is no impact on the monetary base and the money supply, and therefore a sterilized intervention A) causes the exchange rate to overshoot in the short run. B) causes the exchange rate to undershoot in the short run. C) causes the exchange rate to depreciate in the short run, but has no effect on the exchange rate in the long run. D) has no effect on the exchange rate. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 15) Everything else held constant, if a central bank makes a sterilized sale of foreign assets, then the domestic currency will A) appreciate. B) depreciate. C) either appreciate, depreciate, or remain constant. D) not be affected. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking

16) If the United States has a current account deficit with England of $1 million, and the Bank of England sells $1 million worth of pounds in the foreign exchange market, then England ________ $1 million of international reserves and its monetary base ________ by $1 million. A) gains; rises B) gains; falls C) loses; rises D) loses; falls Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 18.2 Balance of Payments 1) The difference between merchandise exports and imports is called the ________ balance. A) current account B) capital account C) official reserve transactions D) trade Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 2) The account that shows a country's current international transactions (that is, transactions that do not involve the purchase or sale of financial assets) for a given year is called the A) trade balance. B) current account. C) balance of payments. D) capital account. Answer: B Ques Status: Revised AACSB: Reflective Thinking 3) The account that shows international transactions that involve the purchase or sale of assets is called the A) trade balance. B) current account. C) balance of payments. D) financial account. Answer: D Ques Status: Revised AACSB: Reflective Thinking

4) Which of the following does NOT appear in the current account part of the balance of payments? A) a loan of $1 million from Bank of America to Brazil B) foreign aid to El Salvador C) an Air France ticket bought by an American D) income earned by General Motors from its plants abroad Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 5) Of the following, the one that appears in the current account of the balance of payments is A) an Italian investor's purchase of IBM stock. B) income earned by U.S. subsidiaries of Barclay's Bank of London. C) a loan by a Swiss bank to an American corporation. D) a purchase of a British Treasury bond by the Fed. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 6) Capital ________ are American purchases of foreign assets, and capital ________ are foreign purchases of American assets. A) inflows; outflows B) inflows; inflows C) outflows; outflows D) outflows; inflows Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 7) Which of the following appears in the financial account? A) a gift to an American from his English aunt B) a purchase by the Honda corporation of a U.S. Treasury bill C) an Air France ticket bought by an American D) income earned by the Honda corporation on its automobile plant in Ohio Answer: B Ques Status: Revised AACSB: Reflective Thinking 8) Which of the following is not included in the current account? A) Net acquisition of financial assets. B) Funds sent by domestic residents and the government to foreigners. C) Net investment income. D) The trade balance. Answer: A Ques Status: New AACSB: Reflective Thinking 6 Copyright © 2019 Pearson Education, Inc.

9) When Americans ________ their net holdings of foreign assets, this change is recorded as a net U.S. acquisition of financial assets in the financial account. When foreigners ________ their net holdings of U.S. assets, this change is recorded as a net U.S. incurrence of liabilities. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease Answer: A Ques Status: New AACSB: Reflective Thinking 10) A current account surplus indicates that America is ________ its claims on foreign wealth, while a deficit indicates that this country is ________ its claims on foreign wealth. A) reducing; reducing B) reducing; increasing C) increasing; reducing D) increasing; increasing Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 18.3 Exchange Rate Regimes in the International Financial System 1) Under a gold standard in which one dollar could be turned in to the U.S. Treasury and exchanged for 1/20th of an ounce of gold and one Swiss Franc could be exchanged for 1/100th of an ounce of gold, an exchange rate of ________ francs to the dollar would stimulate a flow of gold from the United States to Switzerland. A) 7 B) 6 C) 5 D) 4 Answer: D Ques Status: Revised AACSB: Analytical Thinking 2) When gold production was low in the 1870s and 1880s, the money supply grew ________ causing ________. A) rapidly; inflation B) rapidly; disinflation C) slowly; deflation D) slowly; disinflation Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking

3) The fixed exchange rate regime established at a meeting in New Hampshire in 1944 has been known as the A) General Agreement on Tariffs and Trade. B) Bretton Woods system. C) International Settlement Fund. D) Balance of Payments Compliance Accord. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 4) Under the Bretton Woods system, the organization assigned the task of making loans to countries that were experiencing balance of payments difficulties is known as the A) World Bank. B) International Development Association. C) International Monetary Fund. D) Federal Reserve System. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 5) The Bretton Woods agreement created the ________, which was given the task of promoting the growth of world trade by setting rules for the maintenance of fixed exchange rates and by making loans to countries that were experiencing balance of payments difficulties. A) IMF B) World Bank C) Central Settlements Bank D) Bank of International Settlements Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 6) The World Bank is an international organization that A) promotes the growth of trade by setting rules for how tariffs and quotas are set by countries. B) makes loans to countries to finance projects such as dams and roads. C) makes loans to countries with balance of payment difficulties. D) helps developing countries that have been having difficulties in repaying their loans to come to terms with lenders in the West. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking

7) Under the Bretton Woods system, the United States was designated as the A) reserve-currency country. B) fixed-rate country. C) par-standard country. D) dollar-standard country. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 8) Under a fixed exchange rate regime, if the domestic currency is initially ________, that is, ________ par, the central bank must intervene to sell the domestic currency by purchasing foreign assets. A) overvalued; below B) overvalued; above C) undervalued; below D) undervalued; above Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 9) Under a fixed exchange rate regime, if the domestic currency is initially undervalued, that is, above par, the central bank must intervene to sell the ________ currency by purchasing ________ assets. A) domestic; foreign B) domestic; domestic C) foreign; foreign D) foreign; domestic Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 10) Under a fixed exchange rate regime, if the domestic currency is initially ________, that is, ________ par, the central bank must intervene to purchase the domestic currency by selling foreign assets. A) overvalued; below B) overvalued; above C) undervalued; below D) undervalued; above Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking

11) Under a fixed exchange rate regime, if the domestic currency is initially overvalued, that is, below par, the central bank must intervene to purchase the ________ currency by selling ________ assets. A) domestic; foreign B) domestic; domestic C) foreign; foreign D) foreign; domestic Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 12) Under a fixed exchange rate regime, if a central bank must intervene to purchase the ________ currency by selling ________ assets, then, like an open market sale, this action reduces the monetary base and the money supply, causing the interest rate on domestic assets to rise. A) domestic; foreign B) domestic; domestic C) foreign; foreign D) foreign; domestic Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 13) Under a fixed exchange rate regime, if a central bank must intervene to purchase the domestic currency by selling foreign assets, then, like an open market sale, this action ________ the monetary base and the money supply, causing the interest rate on domestic assets to ________. A) increases; rise B) increases; fall C) reduces; rise D) reduces; fall Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 14) When the domestic currency is initially overvalued in a fixed exchange rate regime, the central bank must intervene in the foreign exchange market to ________ the domestic currency, thereby allowing the money supply to ________. A) purchase; decline B) sell; decline C) purchase; increase D) sell; increase Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking

15) When the domestic currency is initially undervalued in a fixed exchange rate regime, the central bank must intervene in the foreign exchange market to ________ the domestic currency, thereby allowing the money supply to ________. A) purchase; decline B) sell; decline C) purchase; increase D) sell; increase Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 16) Under a fixed exchange rate regime, if a country has an overvalued exchange rate, then its central bank's attempt to keep its currency from ________ will result in a ________ of international reserves. A) depreciating; gain B) depreciating; loss C) appreciating; gain D) appreciating; loss Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 17) Under a fixed exchange rate regime, if a country has an ________ exchange rate, then its central bank's attempt to keep its currency from depreciating will result in a ________ of international reserves. A) undervalued; gain B) undervalued; loss C) overvalued; gain D) overvalued; loss Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 18) Under a fixed exchange rate regime, if a country has an undervalued exchange rate, then its central bank's attempt to keep its currency from ________ will result in a ________ of international reserves. A) depreciating; gain B) depreciating; loss C) appreciating; gain D) appreciating; loss Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking

19) Under a fixed exchange rate regime, if a country has an ________ exchange rate, then its central bank's attempt to keep its currency from appreciating will result in a ________ of international reserves. A) undervalued; gain B) undervalued; loss C) overvalued; gain D) overvalued; loss Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 20) Under a fixed exchange rate regime, if a country's central bank runs out of international reserves, it cannot keep its currency from A) depreciating. B) appreciating. C) deflating. D) inflating. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 21) Under a fixed exchange rate regime, a country that depletes its international reserves in an attempt to keep its currency from ________ will be forced to ________ its currency. A) depreciating; revalue B) depreciating; devalue C) appreciating; revalue D) appreciating; devalue Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 22) Under a fixed exchange rate regime, a central bank that does not want to acquire international reserves to keep its currency from ________ will decide to ________ its currency. A) depreciating; revalue B) depreciating; devalue C) appreciating; revalue D) appreciating; devalue Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking

23) A balance of payments deficit is associated with a ________ of international reserves, while a balance of payments surplus is associated with a ________. A) loss; loss B) loss; gain C) gain; loss D) gain; gain Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 24) Because central banks have not been willing to give up their option of intervening in the foreign exchange market, the current international financial system can best be described as a A) variable-pegged exchange rate system. B) moving-pegged exchange rate system. C) hybrid of a fixed exchange rate and flexible exchange rate system. D) flexible-exchange, dollar-pegged exchange rate system. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 25) The current international financial system is a managed float exchange rate system because A) exchange rates fluctuate in response to, but are not determined solely by, market forces. B) some countries keep their currencies pegged to the dollar, which is not allowed to fluctuate. C) all countries allow their exchange rates to fluctuate in response to market forces. D) all countries peg their currencies to the dollar which is allowed to fluctuate in response to market forces. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 26) Policymakers in a country with a balance of payments surplus may not want to see their country's currency appreciate because this would A) hurt consumers in their country by making foreign goods more expensive. B) hurt domestic businesses by making foreign goods cheaper in their country. C) increase inflation in their country. D) decrease the wealth of the country. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking

27) Under the current managed float exchange rate regime, countries with balance of payments deficits frequently do not want to see their currencies depreciate because it makes ________ goods more expensive for ________ consumers and can stimulate inflation. A) foreign; foreign B) foreign; domestic C) domestic; foreign D) domestic; domestic Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 28) Countries with surpluses in their balance of payments frequently do not want to see their currencies ________ because it makes their goods ________ expensive abroad. A) appreciate; less B) appreciate; more C) depreciate; less D) depreciate; more Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 29) Countries with balance of payments deficits do not want to see their currencies ________ because it makes foreign goods ________ expensive for domestic consumers. A) appreciate; less B) appreciate; more C) depreciate; less D) depreciate; more Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 30) Under the current managed float exchange rate regime, countries with ________ in their balance of payments frequently do not want to see their currencies ________ because it makes their goods more expensive abroad and foreign goods cheaper in their countries. A) surpluses; depreciate B) deficits; depreciate C) surpluses; appreciate D) deficits; appreciate Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking

31) Under the current managed float exchange rate regime; countries with surpluses in their balance of payments frequently do not want to see their currencies appreciate because it makes their goods ________ expensive abroad and foreign goods ________ in their countries. A) more; cheaper B) more; costlier C) less; cheaper D) less; costlier Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 32) Under the current managed float exchange rate regime, countries with balance of payments ________ frequently do not want to see their currencies ________ because it makes foreign goods more expensive for domestic consumers and can stimulate inflation. A) surpluses; depreciate B) deficits; depreciate C) surpluses; appreciate D) deficits; appreciate Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 33) A speculative attack involves massive sales of a ________ currency or purchases of a ________ currency that cause a sharp change in the exchange rate under a ________ exchange rate system. A) weak; strong; fixed B) strong; weak; fixed C) weak; strong; floating D) strong; weak; floating Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 34) Under the Exchange Rate Mechanism of the European Monetary System, when the British pound depreciated below its lower limit against the German mark, the Bank of England was required to buy ________ and sell ________, thereby ________ international reserves. A) pounds; marks; losing B) pounds; marks; gaining C) marks; pounds; gaining D) marks; pounds; losing Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge

35) Under the Exchange Rate Mechanism of the European Monetary System, when the British pound depreciated below its lower limit against the German mark, the German central bank was required to buy ________ and sell ________, thereby ________ international reserves. A) pounds; marks; losing B) pounds; marks; gaining C) marks; pounds; gaining D) marks; pounds; losing Answer: B Ques Status: Previous Edition AACSB: Application of Knowledge 36) Under the Exchange Rate Mechanism of the European Monetary System, when the German mark depreciated below its lower limit against the British pound, the Bank of England was required to buy ________ and sell ________, thereby ________ international reserves. A) pounds; marks; losing B) pounds; marks; gaining C) marks; pounds; gaining D) marks; pounds; losing Answer: C Ques Status: Previous Edition AACSB: Application of Knowledge 37) Under the Exchange Rate Mechanism of the European Monetary System, when the German mark depreciated below its lower limit against the British pound, the German central bank was required to buy ________ and sell ________, thereby ________ international reserves. A) pounds; marks; losing B) pounds; marks; gaining C) marks; pounds; gaining D) marks; pounds; losing Answer: D Ques Status: Previous Edition AACSB: Application of Knowledge 38) In September 1992, the Bundesbank attempted to keep the mark from appreciating relative to the British pound, but it failed because participants in the foreign exchange market came to expect the A) appreciation of the mark. B) depreciation of the mark. C) revaluation of the dollar. D) end of the Exchange Rate Mechanism. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking

39) The Policy Trilemma states that a country or a monetary union can't pursue the following three policies at the same time A) capital control, a fixed exchange rate, and an independent monetary policy. B) free capital mobility, a fixed exchange rate, and an independent monetary policy. C) free capital mobility, a flexible exchange rate, and an independent monetary policy. D) capital control, a flexible exchange rate, and an independent monetary policy. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 40) From 1994 to 2005, China chose to have ________ and ________ and therefore, could not have free capital mobility at the same time. A) a fixed exchange rate; no control of monetary policy B) a fixed exchange rate; an independent monetary policy C) a flexible exchange rate; an independent monetary policy D) a flexible exchange rate; no control of monetary policy Answer: B Ques Status: Revised AACSB: Reflective Thinking 41) The United States chooses to have ________ and ________ and therefore, cannot have a fixed exchange rate at the same time. A) capital control; an independent monetary policy B) free capital mobility; an independent monetary policy C) free capital mobility; no control of monetary policy D) capital control; no control of monetary policy Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 42) Hong Kong chooses to have ________ and ________ and therefore, cannot have an independent monetary policy at the same time. A) capital control; a fixed exchange rate B) free capital mobility; a fixed exchange rate C) free capital mobility; a flexible exchange rate D) capital control; a flexible exchange rate Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking

43) Explain and demonstrate graphically the situation of an overvalued exchange rate in a fixed exchange rate system. What alternative policies are available to eliminate the overvaluation of the exchange rate? Answer: See the figure below.

The par value is above the equilibrium value, resulting in overvaluation of the exchange rate. One approach is to pursue contractionary monetary policies, raising interest rates and increasing the demand for domestic assets. This process continues until equilibrium at par value is restored. Another alternative is for the central bank to purchase domestic currency by selling foreign assets. Ques Status: Previous Edition AACSB: Analytical Thinking 44) Assume that a fixed exchange rate is overvalued. Describe the situation of a speculative crisis against this currency. What can the central bank do to defend the currency? Why might the alternative of devaluation be preferable? Answer: When the speculative attack begins, the expected depreciation of the domestic currency increases substantially, decreasing the demand for domestic assets. Contractionary monetary policy is needed to increase domestic interest rates enough to defend the currency. The cost to the central bank in terms of the costs of intervention and the contractionary effect on the economy may make devaluation preferable. Ques Status: Previous Edition AACSB: Analytical Thinking

18.4 Capital Controls 1) A capital ________ can promote financial instability in an emerging-market country because it is what forces a country to ________ its currency. A) inflow; devalue B) inflow; revalue C) outflow; devalue D) outflow; revalue Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 2) A capital ________ can promote financial instability in an emerging-market country because it can lead to a lending boom and excessive risk-taking on the part of banks, which helps trigger a ________. A) inflow; financial crisis B) inflow; currency devaluation C) outflow; financial crisis D) outflow; currency devaluation Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 3) A case for capital inflow controls can be made because capital inflows A) can cause a lending boom and lead to excessive risk taking. B) never finance productive investments. C) always finance productive investments. D) are less likely to cause financial crises than regulation of banking activities. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 4) Which of the following is NOT a disadvantage of controls on capital outflows? A) The controls may lead to excessive risk taking by the domestic banks. B) They are seldom effective during a crisis. C) Capital flight may increase after they are put in place. D) Controls often lead to an increase in government corruption. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking

18.5 The Role of the IMF 1) This agency acts like an international lender of last resort to cope with financial instability. A) World Bank B) European Central Bank C) IMF D) International Bank for Reconstruction and Development Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 2) An international lender of last resort creates a serious ________ problem because depositors and other creditors of banking institutions expect that they will be protected if a crisis occurs. A) moral hazard B) adverse selection C) public choice D) strategic choice Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 3) An international lender of last resort creates a serious moral hazard problem because ________ and other ________ of banking institutions expect that they will be protected if a crisis occurs. A) depositors; debtors B) depositors; creditors C) borrowers; debtors D) borrowers; creditors Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking

18.6 International Considerations and Monetary Policy 1) In the early 1970s, the U.S. ran large balance of payments ________, causing an ________ dollar and an ________ German mark. A) deficits; undervalued; overvalued B) deficits; overvalued; undervalued C) surpluses; undervalued; overvalued D) surpluses; overvalued; undervalued Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 2) In response to the overvalued dollar in the early 1970s, the German Bundesbank bought ________ and sold ________ to keep the exchange rate fixed, gaining international reserves. A) marks; dollars B) marks; pounds C) dollars; marks D) dollars; pounds Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 3) In response to the overvalued dollar in the early 1970s, the German Bundesbank bought dollars and sold marks to keep the exchange rate fixed, gaining international reserves. The huge purchase of international reserves meant that the German monetary base began to ________, leading to ________ growth in the German money supply. A) decline; sluggish B) decline; rapid C) grow; sluggish D) grow; rapid Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 4) The German central bank gained international reserves in the early 1970s because it sold ________ to prevent mark ________. A) marks; appreciation B) dollars; appreciation C) marks; depreciation D) dollars; depreciation Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking

5) Since the abandonment of the Bretton Woods system, balance of payments considerations have become ________ important, and exchange rate considerations ________ important in the conduct of monetary policy. A) more; less B) more; more C) less; less D) less; more Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 6) If a central bank does not want to see its currency fall in value, it may pursue ________ monetary policy to ________ the domestic interest rate, thereby strengthening its currency. A) expansionary; raise B) contractionary; raise C) expansionary; lower D) contractionary; lower Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 7) If a central bank does not want to see its currency ________ in value, it may pursue contractionary monetary policy to raise the domestic interest rate, thereby ________ its currency. A) fall; strengthening B) fall; weakening C) rise; strengthening D) rise; weakening Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 8) If a central bank does not want to see its currency rise in value, it may pursue ________ monetary policy to ________ the domestic interest rate, thereby weakening its currency. A) expansionary; raise B) contractionary; raise C) expansionary; lower D) contractionary; lower Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking

9) If a central bank does not want to see its currency ________ in value, it may pursue expansionary monetary policy to lower the domestic interest rate, thereby ________ its currency. A) fall; strengthening B) fall; weakening C) rise; strengthening D) rise; weakening Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 10) If a central bank does not want to allow the domestic currency to appreciate, it will ________ international reserves by selling its currency, thereby ________ the monetary base and increasing the risk of higher inflation. A) lose; decreasing B) lose; increasing C) acquire; decreasing D) acquire; increasing Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 11) If a central bank does not want to allow the domestic currency to depreciate, it will ________ international reserves by purchasing its currency, thereby ________ the monetary base and increasing the risk of higher unemployment. A) lose; decreasing B) lose; increasing C) acquire; decreasing D) acquire; increasing Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 12) A central bank's attempt to prevent an appreciation of its currency can stimulate domestic inflation if the ________ of its currency leads to ________ international reserves which ________ the monetary base. A) purchase; higher; increases B) purchase; lower; decreases C) sale; lower; decreases D) sale; higher; increases Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking

13) A central bank's attempt to prevent an appreciation of its currency can stimulate domestic inflation if the ________ of foreign currencies leads to ________ international reserves which ________ the monetary base. A) purchase; higher; increases B) purchase; lower; decreases C) sale; lower; decreases D) sale; higher; increases Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 14) To keep from running out of international reserves under the Bretton Woods system, a country had to implement ________ monetary policy to ________ its currency. A) expansionary; strengthen B) expansionary; weaken C) contractionary; strengthen D) contractionary; weaken Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 15) Under the Bretton Woods system, when a country adopted an expansionary monetary policy, thereby causing a balance of payments ________, the country would eventually be forced to implement ________ monetary policy. A) deficit; expansionary B) deficit; contractionary C) surplus; expansionary D) surplus; contractionary Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 16) Because the United States was the reserve-currency country under the Bretton Woods system, it could run large balance of payments ________ without ________ significant amounts of international reserves. A) deficits; losing B) deficits; gaining C) surpluses; losing D) surpluses; gaining Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking

18.7 To Peg or Not To Peg: Exchange-Rate Targeting as an Alternative Monetary Policy Strategy 1) A monetary policy strategy that uses a fixed exchange rate regime that ties the value of a currency to the currency of a large, low inflation country is called ________ targeting. A) exchange-rate B) currency C) monetary D) inflation Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 2) Under an exchange-rate targeting rule for monetary policy, a crawling peg A) fixes the value of the domestic currency to a commodity such as gold. B) fixes the value of the domestic currency to that of a large, low-inflation country. C) allows the domestic currency to depreciate at a steady rate so that inflation in the pegging country can be higher than that of the anchor country. D) allows the domestic currency to depreciate at a steady rate so that inflation in the pegging country can be lower than that of the anchor country. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 3) An advantage to exchange-rate targeting is it helps keep inflation under control by tying the inflation rate for ________ traded goods to what is found in the ________ country. A) domestically; anchor B) domestically; domestic C) internationally; anchor D) internationally; domestic Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 4) Exchange-rate targeting allows a central bank to ________, thus this will ________ the probability of policy developing a time-inconsistency problem. A) be governed by a policy rule; decrease B) follow discretionary policy; decrease C) be governed by a policy rule; increase D) follow discretionary policy; increase Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking

5) Which of the following is NOT an advantage to exchange-rate targeting? A) It provides a strong nominal anchor to keep inflation under control. B) It provides an automatic rule for policy to help avoid the time-inconsistency problem. C) It is simple and clear so that the public can easily understand it. D) It increases the accountability of policymakers. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 6) Under exchange-rate targeting, the central bank in the targeting country ________ lose the ability to pursue its own independent monetary policy and any shocks to the anchor country is ________ transmitted to the targeting country. A) does; directly B) does not; directly C) does; not directly D) does not; not directly Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 7) Both France and the United Kingdom successfully used exchange-rate targeting to lower inflation in the late 1980s and early 1990s by tying the value of their currencies to the A) U.S. dollar. B) German mark. C) Swiss franc. D) Euro. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 8) Which of the following is NOT a disadvantage of exchange-rate targeting? A) It relies on a stable money-inflation relationship. B) The targeting country gives up an independent monetary policy. C) The targeting country is left open for a speculative attack. D) It can weaken the accountability of policymakers. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking

9) Two reasons for an industrialized country to adopt an exchange-rate targeting regime are if the country ________ conduct successful monetary policy on its own, and if the country wants to ________ integration of the domestic economy with its neighbors. A) cannot; encourage B) cannot; discourage C) can; encourage D) can; discourage Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 10) An emerging market country that successfully used exchange-rate targeting to lower its inflation from above 100 percent in 1988 to below 10 percent in 1994 (before devaluation) was A) Thailand. B) Mexico. C) The Philippines. D) Indonesia. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 11) Because many emerging market countries have not developed the political or monetary institutions that allow the successful use of discretionary monetary policy A) they have little to gain from pegging their exchange rate to an anchor country like the U.S. or Germany. B) they have little to gain from using a nominal anchor, because it would mean a monetary policy that is overly expansionary. C) they have very little to gain from an independent monetary policy, but a lot to lose. D) they would be better off giving their central bankers the independence to use discretion, rather than take their discretion away through any nominal anchor. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 12) When a domestic currency is completely backed by a foreign currency and the note-issuing authority establishes a fixed exchange rate to this foreign currency, then the country is said to have A) created a currency board. B) undergone dollarization. C) adopted a managed exchange system. D) adopted an exchange rate monetary system. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking

13) When a country forgoes its own currency and starts using another country's currency as its own, we say that this country has A) created a currency board. B) undergone dollarization. C) adopted a managed exchange system. D) adopted an exchange rate monetary system. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 14) The revenue a government gains from issuing money is A) interest. B) rent. C) seignorage. D) the national dividend. E) the inflation tax. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 15) A country that dollarizes A) maximizes its seignorage. B) earns the same amount of seignorage as it would with a currency board. C) earns the same amount of seignorage as it would with exchange-rate targeting. D) eliminates its seignorage. E) must pay seignorage to other governments to use their currency. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 16) The seignorage for a government is greater for ________ than for ________. A) dollarization; a currency board B) dollarization; exchange-rate targeting C) dollarization; monetary targeting D) dollarization; inflation targeting E) exchange-rate targeting; dollarization Answer: E Ques Status: Previous Edition AACSB: Reflective Thinking

17) The monetary policy strategy that provides an automatic rule for the conduct of monetary policy is A) exchange-rate targeting. B) monetary targeting. C) inflation targeting. D) the implicit nominal anchor. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 18) The monetary policy strategy that does NOT allow the policy to focus on domestic considerations is A) exchange-rate targeting. B) monetary targeting. C) inflation targeting. D) the implicit nominal anchor. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 19) The monetary policy strategy that results in the loss of an independent monetary policy is A) exchange-rate targeting. B) monetary targeting. C) inflation targeting. D) the implicit nominal anchor. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 20) The monetary policy strategy that directly ties down the price of internationally traded goods is A) exchange-rate targeting. B) monetary targeting. C) inflation targeting. D) the implicit nominal anchor. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 21) Explain an additional disadvantage for a country undergoing dollarization compared to a currency board or other exchange-rate targeting regimes. Answer: The additional disadvantage to dollarization is that the government loses seignorage. Seignorage is the income that a government earns by issuing its own currency. Ques Status: Previous Edition AACSB: Analytical Thinking

22) Explain the 1992 crisis that led to the breakdown of the European Union's Exchange Rate Mechanism. What disadvantages of exchange-rate targeting were exhibited during this crisis? Answer: The 1992 crisis began with Germany raising interest rates in 1990 to stem inflationary pressures from reunification. This demand shock was immediately transmitted to the other nations in the exchange-rate mechanism. Thus, these countries did not have independent monetary policies and were subject to shocks from the anchor country. This gave rise to the second problem. Speculators bet that these other countries would not want the increased unemployment resulting from the tight monetary policy. Betting that their commitment was weak, speculators bet against these currencies, and a number were forced to devalue or drop out of the ERM. The disadvantages illustrated by this are the lack of independent policy subjecting member nations to shocks from the anchor nation, and the possibility of speculative attacks when commitment is felt to be weak. Ques Status: Previous Edition AACSB: Analytical Thinking

Economics of Money, Banking, and Financial Markets, 12e (Mishkin) Chapter 19 Quantity Theory, Inflation and the Demand for Money 19.1 Quantity Theory of Money 1) The quantity theory of money is a theory of how A) the money supply is determined. B) interest rates are determined. C) the nominal value of aggregate income is determined. D) the real value of aggregate income is determined. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 2) Because the quantity theory of money tells us how much money is held for a given amount of aggregate income, it is also a theory of A) interest-rate determination. B) the demand for money. C) exchange-rate determination. D) the demand for assets. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 3) The average number of times that a dollar is spent in buying the total amount of final goods and services produced during a given time period is known as A) gross national product. B) the spending multiplier. C) the money multiplier. D) velocity. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 4) The velocity of money is A) the average number of times that a dollar is spent in buying the total amount of final goods and services. B) the ratio of the money stock to high-powered money. C) the ratio of the money stock to interest rates. D) the average number of times a dollar is spent in buying financial assets. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking

5) If the money supply is $500 and nominal income is $3,000, the velocity of money is A) 1/60. B) 1/6. C) 6. D) 60. Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 6) If the money supply is $600 and nominal income is $3,000, the velocity of money is A) 1/50. B) 1/5. C) 5. D) 50. Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 7) If the money supply is $500 and nominal income is $4,000, the velocity of money is A) 1/20. B) 1/8. C) 8. D) 20. Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 8) If the money supply is $600 and nominal income is $3,600, the velocity of money is A) 1/60. B) 1/6. C) 6. D) 60. Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 9) If nominal GDP is $10 trillion, and the money supply is $2 trillion, velocity is A) 0.2. B) 5. C) 10. D) 20. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking

10) If nominal GDP is $8 trillion, and the money supply is $2 trillion, velocity is A) 0.25. B) 4. C) 8. D) 16. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 11) If nominal GDP is $10 trillion, and velocity is 10, the money supply is A) $1 trillion. B) $5 trillion. C) $10 trillion. D) $100 trillion. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 12) If the money supply is $2 trillion and velocity is 5, then nominal GDP is A) $1 trillion. B) $2 trillion. C) $5 trillion. D) $10 trillion. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 13) If the money supply is $20 trillion and velocity is 2, then nominal GDP is A) $2 trillion. B) $10 trillion. C) $20 trillion. D) $40 trillion. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 14) Velocity is defined as A) P + M + Y. B) (P × M)/Y. C) (Y × M)/P. D) (P × Y)/M. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking

15) The velocity of money is defined as A) real GDP divided by the money supply. B) nominal GDP divided by the money supply. C) real GDP times the money supply. D) nominal GDP times the money supply. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 16) The equation of exchange states that the quantity of money multiplied by the number of times this money is spent in a given year must equal A) nominal income. B) real income. C) real gross national product. D) velocity. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 17) In the equation of exchange, the concept that provides the link between M and PY is called A) the velocity of money. B) aggregate demand. C) aggregate supply. D) the money multiplier. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 18) The equation of exchange is A) M × P = V × Y. B) M + V = P + Y. C) M + Y = V + P. D) M × V = P × Y. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 19) Irving Fisher took the view that the institutional features of the economy which affect velocity change ________ over time so that velocity will be fairly ________ in the short run. A) rapidly; erratic B) rapidly; stable C) slowly; stable D) slowly; erratic Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 4 Copyright © 2019 Pearson Education, Inc.

20) In Irving Fisher's quantity theory of money, velocity was determined by A) interest rates. B) real GDP. C) the institutions in an economy that affect individuals' transactions. D) the price level. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 21) The classical economists' conclusion that nominal income is determined by movements in the money supply rested on their belief that ________ could be treated as ________ in the short run. A) velocity; constant B) velocity; variable C) money; constant D) money; variable Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 22) The view that velocity is constant in the short run transforms the equation of exchange into the quantity theory of money. According to the quantity theory of money, when the money supply doubles A) velocity falls by 50 percent. B) velocity doubles. C) nominal incomes falls by 50 percent. D) nominal income doubles. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 23) Cutting the money supply by one-third is predicted by the quantity theory of money to cause A) a sharp decline in real output of one-third in the short run, and a fall in the price level by onethird in the long run. B) a decline in real output by one-third. C) a decline in output by one-sixth, and a decline in the price level of one-sixth. D) a decline in the price level by one-third. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking

24) The classical economists believed that if the quantity of money doubled A) output would double. B) prices would fall. C) prices would double. D) prices would remain constant. Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 25) The classical economists' contention that prices double when the money supply doubles is predicated on the belief that in the short run velocity is ________ and real GDP is ________. A) constant; constant B) constant; variable C) variable; variable D) variable; constant Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 26) For the classical economists, the quantity theory of money provided an explanation of movements in the price level. Changes in the price level result A) from proportional changes in the quantity of money. B) primarily from changes in the quantity of money. C) only partially from changes in the quantity of money. D) from changes in factors other than the quantity of money. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 27) If initially the money supply is $1 trillion, velocity is 5, the price level is 1, and real GDP is $5 trillion, an increase in the money supply to $2 trillion A) increases real GDP to $10 trillion. B) causes velocity to fall to 2.5. C) increases the price level to 2. D) increases the price level to 2 and velocity to 10. Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking

28) If initially the money supply is $2 trillion, velocity is 5, the price level is 2, and real GDP is $5 trillion, a fall in the money supply to $1 trillion A) reduces real GDP to $2.5 trillion. B) causes velocity to rise to 10. C) decreases the price level to 1. D) decreases the price level to 1 and decreases velocity to 2.5. Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 29) According to the quantity theory of money demand A) an increase in interest rates will cause the demand for money to fall. B) a decrease in interest rates will cause the demand for money to increase. C) interest rates have no effect on the demand for money. D) an increase in money will cause the demand for money to fall. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 30) Fisher's quantity theory of money suggests that the demand for money is purely a function of ________, and ________ no effect on the demand for money. A) income; interest rates have B) interest rates; income has C) government spending; interest rates have D) expectations; income has Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 31) ________ quantity theory of money suggests that the demand for money is purely a function of income, and interest rates have no effect on the demand for money. A) Keynes's B) Fisher's C) Friedman's D) Tobin's Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking

32) Irving Fisher's view that velocity is fairly constant in the short run transforms the equation of exchange into the A) Friedman's theory of income determination. B) quantity theory of money. C) Keynesian theory of income determination. D) monetary theory of income determination. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 33) The quantity theory of inflation indicates that the inflation rate equals A) the growth rate of the money supply minus the growth rate of aggregate output. B) the level of the money supply minus the level of aggregate output. C) the growth rate of the money supply plus the growth rate of aggregate output. D) the level of the money supply plus the level of aggregate output. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 34) The quantity theory of inflation indicates that if the aggregate output is growing at 3% per year and the growth rate of money is 5%, then inflation is A) 2%. B) 8%. C) -2%. D) 1.6%. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 35) Empirical evidence shows that the quantity theory of money is a good theory of inflation A) in the long run, but not in the short run. B) in the short run, but not in the longrun. C) in both the long run and the short run. D) not in either the long run nor the short run. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking

19.2 Budget Deficits and Inflation 1) Methods of financing government spending are described by an expression called the government budget constraint, which states the following A) the government budget deficit must equal the sum of the change in the monetary base and the change in government bonds held by the public. B) the government budget deficit must equal the difference between the change in the monetary base and the change in government bonds held by the public. C) the government budget deficit must equal the difference between the change in the monetary base and the change in government bonds held by the Fed. D) the government budget deficit must equal the difference between the change in the monetary base and the change in government bonds held by the Treasury. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 2) Methods of financing government spending are described by an expression called the government budget constraint, which states the following A) DEFICIT = (G - T) = ΔMB + ΔBONDS. B) DEFICIT = (G - T) = ΔMB - ΔBONDS. C) DEFICIT = (G - T) = ΔBONDS - ΔMB. D) DEFICIT = (G - T) = ΔMB/ΔBONDS. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 3) If the government finances its spending by issuing debt to the public, the monetary base will ________ and the money supply will ________. A) increase; increase B) increase; decrease C) decrease; increase D) not change; not change Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 4) If the government finances its spending by selling bonds to the central bank, the monetary base will ________ and the money supply will ________. A) increase; increase B) increase; decrease C) decrease; decrease D) not change; not change Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking

5) Financing government spending with taxes A) causes both reserves and the monetary base to rise. B) causes both reserves and the monetary base to decline. C) causes reserves to rise, but the monetary base to decline. D) has no net effect on the monetary base. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 6) Financing government spending by selling bonds to the public, which pays for the bonds with currency, A) leads to a permanent decline in the monetary base. B) leads to a permanent increase in the monetary base. C) leads to a temporary increase in the monetary base. D) has no net effect on the monetary base. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 7) The financing of government spending by issuing debt A) causes both reserves and the monetary base to rise. B) causes both reserves and the monetary base to decline. C) causes reserves to rise, but the monetary base to decline. D) has no net effect on the monetary base. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 8) The finance of government spending through a Treasury sale of bonds which are then purchased by the Fed A) causes both reserves and the monetary base to rise. B) causes both reserves and the monetary base to decline. C) causes reserves to rise, but the monetary base to decline. D) has no net effect on the monetary base. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking

9) This method of financing government spending is frequently called printing money because high-powered money (the monetary base) is created in the process. A) financing government spending with taxes B) financing government spending through a Treasury sale of bonds that are then purchased by the Fed C) financing government spending by selling bonds to the public, which pays for the bonds with currency D) financing government spending by selling bonds to the public, which pays for the bonds with checks Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 10) Only when budget deficits are financed by money creation does the increased government spending lead to ________ in the ________. A) a decrease; monetary base B) an increase; monetary base C) a decrease; money multiplier D) an increase; money multiplier Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 11) If the deficit is financed by selling bonds to the ________, the money supply will ________, increasing aggregate demand, and leading to a rise in the price level. A) public; rise B) public; fall C) central bank; rise D) central bank; fall Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 12) If the deficit is financed by selling bonds to the ________, the money supply will ________, causing aggregate demand to ________. A) public; rise; increase B) public; fall; decrease C) central bank; rise; increase D) central bank; fall; decrease Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking

19.3 Keynesian Theories of Money Demand 1) The Keynesian theory of money demand emphasizes the importance of A) a constant velocity. B) irrational behavior on the part of some economic agents. C) interest rates on the demand for money. D) expectations. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 2) Keynes hypothesized that the transactions component of money demand was primarily determined by the level of A) interest rates. B) velocity. C) income. D) stock market prices. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 3) Keynes argued that the transactions component of the demand for money was primarily determined by the level of people's ________, which he believed were proportional to ________. A) transactions; income B) transactions; age C) incomes; wealth D) incomes; age Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 4) Keynes hypothesized that the precautionary component of money demand was primarily determined by the level of A) interest rates. B) velocity. C) income. D) stock market prices. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking

5) Keynes argued that the precautionary component of the demand for money was primarily determined by the level of people's ________, which he believed were proportional to ________. A) incomes; wealth B) incomes; age C) transactions; income D) transactions; age Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 6) The demand for money as a cushion against unexpected contingencies is called the A) transactions motive. B) precautionary motive. C) insurance motive. D) speculative motive. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 7) Keynes hypothesized that the speculative component of money demand was primarily determined by the level of A) interest rates. B) velocity. C) income. D) stock market prices. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 8) The speculative motive for holding money is closely tied to what function of money? A) store of wealth B) unit of account C) medium of exchange D) standard of deferred payment Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 9) Of the three motives for holding money suggested by Keynes, which did he believe to be the most sensitive to interest rates? A) the transactions motive B) the precautionary motive C) the speculative motive D) the altruistic motive Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 13 Copyright © 2019 Pearson Education, Inc.

10) Because Keynes assumed that the expected return on money was zero, he argued that people would A) never hold money. B) never hold money as a store of wealth. C) hold money as a store of wealth when the expected return on bonds was negative. D) hold money as a store of wealth only when forced to by government policy. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 11) The Keynesian theory of money demand predicts that people will increase their money holdings if they believe that A) interest rates are about to fall. B) bond prices are about to rise. C) expected inflation is about to fall. D) bond prices are about to fall. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 12) If people expect nominal interest rates to be higher in the future, the expected return to bonds ________, and the demand for money ________. A) rises; increases B) rises; decreases C) falls; increases D) falls; decreases Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 13) If people expect nominal interest rates to be lower in the future, the expected return to bonds ________, and the demand for money ________. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking

14) Keynes argued that when interest rates were low relative to some normal value, people would expect bond prices to ________ so the quantity of money demanded would ________. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 15) Keynes argued that when interest rates were high relative to some normal value, people would expect bond prices to ________, so the quantity of money demanded would ________. A) increase; increase B) increase; decrease C) decrease; decrease D) decrease; increase Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 16) According to Keynes's theory of liquidity preference, velocity increases when A) income increases. B) wealth increases. C) brokerage commissions increase. D) interest rates increase. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 17) Keynes's theory of the demand for money implies that velocity is A) not constant but fluctuates with movements in interest rates. B) not constant but fluctuates with movements in the price level. C) not constant but fluctuates with movements in the time of year. D) a constant. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 18) Because interest rates have substantial fluctuations, the ________ theory of the demand for money indicates that velocity has substantial fluctuations as well. A) classical B) Cambridge C) liquidity preference D) Pigouvian Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 15 Copyright © 2019 Pearson Education, Inc.

19) Keynes's liquidity preference theory indicates that the demand for money A) is purely a function of income, and interest rates have no effect on the demand for money. B) is purely a function of interest rates, and income has no effect on the demand for money. C) is a function of both income and interest rates. D) is a function of both government spending and income. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 20) Keynes's theory of the demand for money is consistent with A) countercyclical movements in velocity. B) a constant velocity. C) procyclical movements in velocity. D) a relatively stable velocity. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 21) Keynes's theory of the demand for money is consistent with ________ movements in ________. A) countercyclical; velocity B) procyclical; velocity C) countercyclical; expectations D) procyclical; expectations Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 22) Keynes's model of the demand for money suggests that velocity is A) constant. B) positively related to interest rates. C) negatively related to interest rates. D) positively related to bond values. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 23) Keynes's liquidity preference theory indicates that the demand for money is A) constant. B) positively related to interest rates. C) negatively related to interest rates. D) negatively related to bond values. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 16 Copyright © 2019 Pearson Education, Inc.

24) Keynes's model of the demand for money suggests that velocity is ________ related to ________. A) positively; interest rates B) negatively; interest rates C) positively; bond values D) positively; stock prices Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 25) Keynes's liquidity preference theory indicates that the demand for money is ________ related to ________. A) negatively; interest rates B) positively; interest rates C) negatively; income D) negatively; wealth Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 26) The Keynesian demand for real balances can be expressed as A) Md = f(i,Y). B) Md/P = f(i). C) Md/P = f(Y). D) Md/P = f(i,Y). Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 27) Explain the Keynesian theory of money demand. What motives did Keynes think determined money demand? What are the two reasons why Keynes thought velocity could NOT be treated as a constant? Answer: Keynes believed the demand for money depended on income and interest rates. Money was held to facilitate normal transactions and as a precaution for unexpected transactions. For both of these motives, money demand depended on income. People also held money as an asset, for speculative purposes. The speculative motive depends on income and interest rates. People hold more money for speculative purposes when they expect bond prices to fall, generating a negative return on bonds. Since money demand varies with interest rates, velocity changes when interest rates change. Also, since money demand depends upon expectations about future interest rates, unstable expectations can make money demand, and thus velocity, unstable. Ques Status: Previous Edition AACSB: Reflective Thinking

19.4 Portfolio Theories of Money Demand 1) The portfolio theories of money demand state that the demand for real money balances is ________ related to income and ________ related to the nominal interest rate. A) positively; negatively B) positively; positively C) negatively; negatively D) negatively; positively Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 2) The portfolio theories of money demand state that when income (and therefore, wealth) is higher, the demand for the money asset will ________ and the demand for real money balances will be ________. A) rise; higher B) rise; lower C) fall; higher D) fall; lower Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 3) As interest rates rise, the expected absolute return of money ________, money's expected return relative to bonds ________. A) does not change; decrease B) rises; decrease C) does not change; increase D) falls; decrease Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 4) The theory of portfolio choice indicates that higher interest rates make money ________ desirable, and the demand for real money balances ________. A) less; falls B) more; falls C) less; rises D) more; rises Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking

5) The theory of portfolio choice indicates that factors affecting the demand for money include A) income. B) nominal interest rate. C) liquidity of other assets. D) all the above. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 6) The theory of portfolio choice indicates that factors affecting the demand for money include A) income. B) nominal interest rate. C) riskiness of money. D) all the above. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 19.5 Empirical Evidence for the Demand for Money 1) The evidence on the interest sensitivity of the demand for money suggests that the demand for money is ________ to interest rates, and there is ________ evidence that a liquidity trap exists. A) sensitive; substantial B) sensitive; little C) insensitive; substantial D) insensitive; little Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 2) In the liquidity trap a small change in interest rates produces ________ change in the quantity of money demanded. A) a small B) no C) a proportionate D) a very large Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking

3) In a liquidity trap, monetary policy has ________ effect on aggregate spending because a change in the money supply has ________ effect on interest rates. A) no; no B) no; a large C) no; a small D) a large; a large Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 4) In the liquidity trap, monetary policy A) has a large impact on interest rates. B) has a small impact on interest rates. C) has no impact on interest rates. D) has a proportionate impact on interest rates. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 5) In the liquidity trap, the money demand curve A) is horizontal. B) is vertical. C) is negatively sloped. D) is positively sloped. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 6) Evidence suggests that a liquidity trap is possible when A) real interest rates are at zero. B) real interest rates are at or just above zero. C) nominal interest rates are at zero. D) nominal interest rates are at or just above zero. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 7) The reason that economists are so interested in the stability of velocity is because if the demand for money is not stable, then steady growth of the money supply A) is going to promote price stability at the expense of low unemployment. B) is going to promote low unemployment at the expense of price stability. C) is an ineffective way to conduct monetary policy. D) can still be used to conduct monetary policy if the goal is price stability. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 20 Copyright © 2019 Pearson Education, Inc.

8) Describe what the liquidity trap is. Explain how it can be problematic for monetary policymakers. Answer: The liquidity trap describes the situation in which the demand for money is insensitive to changes in interest rates (i.e., the money demand curve is infinitely elastic). In this case, monetary policy has no direct affect on aggregate spending because a change in the money supply will not affect interest rates. Ques Status: Previous Edition AACSB: Reflective Thinking 19.6 Web Appendix 1: The Baumol-Tobin and Tobin Mean Variance Model of the Demand for Money 1) The absence of money illusion means that A) as real income doubles, the demand for money doubles. B) as interest rates double, the demand for money doubles. C) as the money supply doubles, the demand for money doubles. D) as the price level doubles, the demand for money doubles. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 2) If there are economies of scale in the transactions demand for money, as income increases, money demand A) increases proportionately. B) increases less than proportionately. C) increases more than proportionately. D) does not change. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 3) Comparing Tobin's model of the speculative demand for money with Keynesian speculative demand A) both models imply that individuals hold only money or only bonds. B) the Keynesian model implies individuals diversify their asset holdings, while the Tobin model predicts that individuals hold only money or only bonds. C) the Tobin model implies individuals diversify their asset holdings, while the Keynesian model predicts that individuals hold only money or only bonds. D) both models imply that individuals diversify their asset holdings. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking

4) In the Baumol-Tobin model, given that total costs for an individual equals

, where

T0 = monthly income, b = brokerage costs, and C = amount raised from each bond transaction, derive the so-called square root rule. Answer: An individual will minimize their costs. Thus, the optimal level of C is found as follows: COSTS = =

+ +

= Since money demand is the average desired holdings of cash balances, C/2: Md =

The last expression is the square root rule. Ques Status: Previous Edition AACSB: Analytical Thinking 5) The Baumol-Tobin analysis suggests that A) velocity is relatively constant. B) the transactions component of the demand for money is negatively related to the level of interest rates. C) the speculative motive is nonexistent. D) velocity is unrelated to the transactions motive. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 6) The Baumol-Tobin analysis suggests that an increase in the brokerage fee for buying and selling bonds will cause the demand for money to ________ and the demand for bonds to ________. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking

7) The Baumol-Tobin analysis suggests that a decrease in the brokerage fee for buying and selling bonds will cause the demand for money to ________ and the demand for bonds to ________. A) increase; increase B) increase; decrease C) decrease; decrease D) decrease; increase Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 8) In the Baumol-Tobin analysis of transactions demand for money, either an increase in ________ or a decrease in ________ increases money demand. A) income; interest rate B) interest rates; brokerage fees C) brokerage fees; income D) interest rate; income Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 9) In the Baumol-Tobin analysis of the demand for money, either an increase in ________ or an increase in ________ increases money demand. A) income; interest rates B) brokerage fees; interest rates C) interest rates; the price level D) brokerage fees; income Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 10) In the Baumol-Tobin analysis of transactions demand, scale economies imply that an increase in real income increases the quantity of money demanded ________, while an increase in the price level increases the quantity of money demanded ________. A) proportionately; less than proportionately B) more than proportionately; proportionately C) less than proportionately; proportionately D) proportionately; more than proportionately Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking

11) Tobin's model of the speculative demand for money improves on Keynes's analysis by showing that A) the speculative demand for money is interest insensitive. B) the transactions demand for money is interest insensitive. C) people will hold a diversified portfolio. D) people will hold money or bonds but not both. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 12) Tobin's model of the speculative demand for money shows that people hold money as a store of wealth as a way of A) reducing risk. B) reducing income. C) avoiding taxes. D) reducing transactions cost. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 13) Tobin's model of the speculative demand for money shows that people hold money as a ________ as a way of reducing ________. A) medium of exchange; transaction costs B) medium of exchange; risk C) store of wealth; transaction costs D) store of wealth; risk Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 14) Tobin's model of the speculative demand for money shows that people can reduce their ________ by ________ their asset holdings. A) wealth; diversifying B) risk; specializing C) return; diversifying D) risk; diversifying Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking

15) Because Treasury bills pay a higher return than money and have no risk A) the transactions demand for money may be zero. B) the precautionary demand for money may be zero. C) the speculative demand for money may be zero. D) all three of the above motives for holding money will be zero. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 16) The speculative demand for money may not exist because A) banks now pay interest on some types of checkable deposits. B) there are alternative riskless assets paying higher returns than the return on money. C) the transactions demand can be shown to depend on interest rates. D) government regulations have eliminated risk in the financial markets. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 17) What factors determine the demand for money in the Baumol-Tobin analysis of transactions demand for money? How does a change in each factor affect the quantity of money demanded? Answer: The factors are real income, the price level, interest rates, and the brokerage cost of shifting between money and bonds. Increases in real income increase money demand less than proportionately, since the model predicts scale economies in transactions demand. Increases in prices increase money demand proportionately, since the demand is for real balances. The quantity of money demanded varies inversely with interest rates, since interest is the opportunity cost of holding money. The brokerage fee is the cost of converting other assets (bonds) into money. An increase in this cost increases money demand. Ques Status: Previous Edition AACSB: Reflective Thinking

19.7 Web Appendix 2: Empirical Evidence on the Demand for Money 1) In one of the earliest studies on the link between interest rates and money demand using United States data, James Tobin concluded that the demand for money is A) sensitive to interest rates. B) not sensitive to interest rates. C) not sensitive to changes in income. D) not sensitive to changes in bond values. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 2) Starting in 1974, the conventional M1 money demand function began to A) severely underpredict the demand for money. B) severely overpredict the demand for money. C) predict more precisely the demand for money. D) do none of the above. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 3) Starting in 1974, the conventional M1 money demand function began to severely ________ the demand for money. Stephen Goldfeld labeled this phenomenon "the case of the missing ________." A) underpredict; velocity B) overpredict; velocity C) underpredict; money D) overpredict; money Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 4) Conventional money demand functions tended to ________ money demand in the middle and late 1970s, and ________ velocity beginning in 1982. A) overpredict; overpredict B) overpredict; underpredict C) underpredict; overpredict D) underpredict; underpredict Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking

5) Researchers at the Federal Reserve found that M2 money demand functions performed ________ in the 1980s, with M2 velocity moving ________ with the opportunity cost of holding M2. A) poorly; erratically B) poorly; closely C) well; erratically D) well; closely Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 6) In the early 1990s, M2 growth underwent a dramatic ________, which some researchers believe ________ be explained by traditional money demand functions. A) surge; cannot B) surge; can C) slowdown; cannot D) slowdown; can Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 7) In the late 1990s, M2 velocity ________, suggesting a ________ normal relationship between M2 and macroeconomic variables. A) stabilized; less B) stabilized; more C) slowed; less D) slowed; more Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking

Economics of Money, Banking, and Financial Markets, 12e (Mishkin) Chapter 20 The IS Curve 20.1 Planned Expenditure and Aggregate Demand 1) His analysis started with the recognition that the total quantity demanded of an economy's output was the sum of four types of spending: consumer expenditure, planned investment spending, government spending, and net exports. A) John Maynard Keynes B) Sir John Hicks C) Milton Friedman D) Paul A. Samuelson Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 2) Keynes's motivation in developing the aggregate output determination model stemmed from his concern with explaining A) the hyperinflations of the 1920s. B) why the Great Depression occurred. C) the high unemployment in Great Britain before World War I. D) the high unemployment in Great Britain after World War II. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 3) Keynes was especially interested in explaining movements of ________ because he wanted to explain why the Great Depression had occurred and how government policy could be used to increase ________ in a similar economic situation. A) aggregate output; wages B) aggregate output; employment C) wage rates; wages D) wage rates; employment Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 4) Keynes was especially concerned with explaining the A) recession of 1920-21. B) low levels of output and employment during the Great Depression. C) strong economic growth of the 1920s. D) high unemployment in Great Britain during the 1920s. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking

5) Keynes was especially concerned with explaining the ________ level of output and employment during the ________. A) low; 1920s B) low; 1930s C) high; 1920s D) high; 1930s Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 6) In the simple Keynesian model, equilibrium aggregate output is determined by A) aggregate demand. B) aggregate supply. C) the national demand for labor. D) the price level. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 7) Under Keynesian analysis, aggregate demand can be written as A) Yad = C + I + G + NX. B) Yad = C + I + G - NX. C) Yad = C - I - G - NX. D) Yad = C + I - G - NX. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking

20.2 The Components of Aggregate Demand 1) Keynes reasoned that consumer expenditure is most closely related to A) the level of interest rates. B) the price level. C) disposable income. D) the marginal tax rate. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 2) In the Keynesian model of income determination, consumer expenditure includes spending by A) consumers on personal computers. B) businesses on personal computers. C) governments on personal computers. D) foreigners on domestic personal computers. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 3) The marginal propensity to consume (mpc) can be defined as the fraction of A) a change in income that is spent. B) a change in income that is saved. C) income that is spent. D) income that is saved. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 4) If the consumption function is expressed as C = a + mpc × YD, then "mpc" represents A) autonomous consumer expenditure. B) the marginal propensity to consume. C) the expenditure multiplier. D) disposable income. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 5) If the consumption function is expressed as C = a + mpc × YD, then "a" represents A) autonomous consumer expenditure. B) the marginal propensity to consume. C) the expenditure multiplier. D) disposable income. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 3 Copyright © 2019 Pearson Education, Inc.

6) If the consumption function is C = 20 + 0.5YD, then an increase in disposable income by $100 will result in an increase in consumer expenditure by A) $25. B) $70. C) $50. D) $100. Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 7) If the consumption function is C = 20 + 0.8YD, then an increase in disposable income by $100 will result in an increase in consumer expenditure by A) $58. B) $64. C) $80. D) $100. Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 8) Assume that autonomous consumption equals $200 and that the mpc equals 0.8. If disposable income equals $1,000, then total consumption equals A) $80. B) $200. C) $800. D) $1,000. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 9) Assume that autonomous consumption equals $200 and disposable income equals $1,000. If total consumption equal $800, then the mpc equals A) 0.2. B) 0.6. C) 0.8. D) 1.0. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking

10) Assume that disposable income equals $1,000 and the mpc equals 0.6. If total consumption equal $800, then autonomous consumption is equal to A) $0. B) $200. C) $800. D) $1,000. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 11) Everything else held constant, if total consumption increases from $600 to $800 because of an increase of disposable income of $400, then the mpc is equal to A) 0.2. B) 0.4. C) 0.5. D) 0.6. Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 12) Everything else held constant, if consumption expenditure increases by 65 for a 100 increase in disposable income, the mpc is A) 0. B) 0.5. C) 0.65. D) 1. Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 13) Everything else held constant, if disposable income increases by 200 and consumption expenditure increases by 150, the mpc is A) 0. B) 0.15. C) 0.5. D) 0.75. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking

14) Everything else held constant, if consumption expenditure falls by 160 when disposable income falls by 200, the mpc is A) 0. B) 0.2. C) 0.4. D) 0.8. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 15) Economists define investment as the purchase of A) a new physical asset such as a new machine or a new house. B) any physical asset, whether new or not, used by business to increase production. C) any physical asset used by business to increase production and the repurchase of common stock. D) business spending on capital and household spending on durable goods. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 16) Planned investment spending, a component of aggregate demand, is equal to A) fixed investment plus actual inventory investment. B) fixed investment plus unplanned inventory investment. C) fixed investment. D) fixed investment plus planned inventory investment. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 17) There are two types of investment: ________ investment—the spending by business firms on equipment and structures, and planned spending on residential houses—and ________ investment—spending by business firms on additional holdings of raw materials, parts, and finished goods. A) planned; gross B) planned; inventory C) fixed; gross D) fixed; inventory Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking

18) A fall in inventories is synonymous with ________ investment. A) negative fixed B) positive fixed C) positive inventory D) negative inventory Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 19) A difference between inventory investment and fixed investment is that A) fixed investment is never unplanned. B) fixed investment is never planned. C) inventory investment is never unplanned. D) unplanned inventory investment is always zero. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 20) Keynes mentioned two factors that influenced planned investment spending A) interest rates and disposable income. B) interest rates and business expectations about the future. C) disposable income and business expectations about the future. D) interest rates and business expectations about inflation. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 21) Factors that influenced planned investment spending include A) real interest rates. B) financial frictions. C) emotional waves of optimism and pessimism. D) all of the above. E) A and C. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 22) Planned investment spending is higher A) when real interest rate is higher. B) during financial frictions. C) when businesses are optimistic. D) all of the above. E) A and C. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 7 Copyright © 2019 Pearson Education, Inc.

23) Aggregate demand in an economy with no government or foreign trade is A) consumer expenditure plus actual investment. B) consumer expenditure plus planned investment. C) consumer expenditure plus inventory investment. D) consumer expenditure plus fixed investment. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 20.3 Goods Market Equilibrium 1) If unplanned investment is positive, firms will ________ production and output will ________. A) cut; rise B) cut; fall C) increase; rise D) increase; fall Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 2) If unplanned investment is negative, firms will ________ production and output will ________. A) cut; rise B) cut; fall C) increase; rise D) increase; fall Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 3) In the Keynesian framework, as long as output is below the equilibrium level, unplanned inventory investment will remain ________ and firms will continue to ________ production. A) negative; lower B) negative; raise C) positive; lower D) positive; raise Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking

4) In the Keynesian framework, as long as output is ________ the equilibrium level, unplanned inventory investment will remain ________ and firms will continue to raise production. A) below; negative B) above; negative C) below; positive D) above; positive Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 5) In the Keynesian framework, as long as output is ________ the equilibrium level, unplanned inventory investment will remain ________ and firms will continue to lower production. A) below; negative B) above; negative C) below; positive D) above; positive Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 6) In the Keynesian framework, as long as output is ________ the equilibrium level, unplanned inventory investment will remain positive and firms will continue to ________ production. A) below; lower B) above; lower C) below; raise D) above; raise Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 7) In the Keynesian framework, as long as output is above the equilibrium level, unplanned inventory investment will remain ________ and firms will continue to ________ production. A) negative; lower B) negative; raise C) positive; lower D) positive; raise Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking

8) In the Keynesian framework, as long as output is ________ the equilibrium level, unplanned inventory investment will remain negative and firms will continue to ________ production. A) below; lower B) above; lower C) below; raise D) above; raise Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 9) In the Keynesian framework, as long as output is below the equilibrium level, unplanned inventory investment will remain negative, firms will continue to ________ production, and output will continue to ________. A) lower; fall B) lower; rise C) raise; fall D) raise; rise Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 10) In the Keynesian framework, as long as output is ________ the equilibrium level, unplanned inventory investment will remain ________, firms will continue to raise production, and output will continue to rise. A) below; negative B) above; negative C) below; positive D) above; positive Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 11) In the Keynesian framework, as long as output is ________ the equilibrium level, unplanned inventory investment will remain ________, firms will continue to lower production, and output will continue to fall. A) below; negative B) above; negative C) below; positive D) above; positive Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking

12) An increase in unplanned inventory investment for the entire economy equals the excess of A) output over aggregate supply. B) output over aggregate demand. C) aggregate supply over output. D) aggregate demand over output. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 13) A decrease in unplanned inventory investment for the entire economy equals the excess of A) output over aggregate supply. B) output over aggregate demand. C) aggregate supply over output. D) aggregate demand over output. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 14) If aggregate demand is less than the level of aggregate output, then ________ inventory investment will be ________. A) planned; positive B) actual; positive C) actual; negative D) planned; negative Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 15) If aggregate demand falls short of current output, business firms will ________ production to ________ inventories. A) cut; keep from accumulating B) expand; keep from accumulating C) cut; build up D) expand; build up Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 16) If aggregated demand is less than actual output, unplanned inventory ________ will cause output to ________. A) accumulation; rise B) depletion; fall C) depletion; rise D) accumulation; fall Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 11 Copyright © 2019 Pearson Education, Inc.

17) If actual output is less than equilibrium output, firms will ________ output to keep from ________ inventories. A) increase; accumulating B) increase; depleting C) decrease; depleting D) decrease; accumulating Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 18) If actual output is greater than equilibrium output, firms will ________ output to keep from ________ inventories. A) increase; accumulating B) increase; depleting C) decrease; depleting D) decrease; accumulating Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 19) When the level of unplanned inventory investment is equal to zero, the economy is A) in disequilibrium. B) in a recession. C) in equilibrium. D) overheating. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 20) If aggregate demand equals output, A) the economy is in a recession. B) output will increase. C) output will fall. D) the economy is at its equilibrium level. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking

Situation 20-1 Assume a closed economy with no government. Suppose that autonomous consumption equals $400, planned investment equals $500, and the mpc equals 0.9. 21) Using the information in Situation 20-1, if aggregate output is equal to $10,000, then unplanned inventory investment equals A) -$1,000. B) -$100. C) $0. D) $100. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 22) Using the information in Situation 20-1, if aggregate output equals $8,000, the unplanned inventory investment equals A) -$100. B) $0. C) $100. D) $500. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 23) Using the information in Situation 20-1, the equilibrium level of aggregate output is A) $900. B) $8,000. C) $9,000. D) $10,000. Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 24) Using the information contained in Situation 20-1, if autonomous consumption increases by $100, then equilibrium aggregate output will change by A) -$1,000. B) -$100. C) $100. D) $1,000. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking

25) Using the information contained in Situation 20-1, if planned investment decreases by $100, the equilibrium aggregate output will change by A) -$1,000. B) $-100. C) $100. D) $1,000. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 26) Keynes believed that changes in autonomous spending were dominated by changes in A) consumer expenditure. B) autonomous consumer expenditure. C) investment spending. D) taxes. E) none of the above. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 27) Keynes believed that changes in autonomous spending were dominated by unstable fluctuations in ________, which are influenced by emotional waves of optimism and pessimism—factors he referred to as "animal spirits." A) unplanned investment spending B) actual investment spending C) planned investment spending D) autonomous consumer expenditures Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 28) In the simple Keynesian framework, declines in planned investment spending that produce high unemployment can be offset by raising A) taxes. B) government spending. C) consumer confidence. D) business confidence. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking

29) The Keynesian framework indicates that government can play an important role in determining aggregate output by A) changing the level of government spending or taxes. B) raising consumer confidence. C) raising investor confidence. D) changing the money supply and interest rates. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 30) A tax cut initially A) increases consumption expenditure by an amount greater than the tax cut. B) increases consumption expenditure by an amount equal to the tax cut. C) increases consumption expenditure by an amount that is less than the value of the tax cut. D) has no effect on consumption expenditure. E) reduces consumption expenditure by an amount that is less than the value of the tax cut. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 31) Assume equilibrium at full employment for an economy characterized by the simple Keynesian model. If the government raises taxes to eliminate a budget deficit, then A) the rate of unemployment will increase. B) the level of aggregate output will increase. C) the price level will increase. D) the rate of interest will fall. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking

Situation 20-2 Assume a closed economy. Suppose that autonomous consumption equals $400, planned investment equals $500, government expenditure equals $200, net taxes equals $50, and the mpc equals 0.9. 32) Using the information in situation 20-2, if government spending increases by $100, then the equilibrium aggregate output will change by A) -$1,000. B) -$100. C) $100. D) $1,000. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 33) Using the information in Situation 20-2, if taxes increase by $10, then the equilibrium aggregate output will change by A) -$90. B) -$10. C) $10. D) $90. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 34) Using the information in situation 20-2, if government increases their spending by $50 and increases net taxes by 50, then equilibrium aggregate output will change by A) -$100. B) -$50. C) $50. D) $100. Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 35) In a closed economy, aggregate demand is the sum of A) consumer expenditure, actual investment spending, and government spending. B) consumer expenditure, planned investment spending, and government spending. C) consumer expenditure, actual investment spending, government spending, and net exports. D) consumer expenditure, planned investment spending, government spending, and net exports. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking

36) In an open economy, aggregate demand is the sum of A) consumer expenditure, actual investment spending, and government spending. B) consumer expenditure, planned investment spending, and government spending. C) consumer expenditure, actual investment spending, government spending, and net exports. D) consumer expenditure, planned investment spending, government spending, and net exports. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 37) If net exports increase by 100 and the mpc is 0.75, equilibrium aggregate output increases by A) 100. B) 250. C) 400. D) 750. Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 38) If net exports increase by 250 and the mpc is 0.75, equilibrium aggregate output increases by A) 250. B) 500. C) 750. D) 1,000. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 39) If net exports decrease by 250 and the mpc is 0.75, equilibrium aggregate output A) increases by 1,000. B) increases by 750. C) decreases by 750. D) decreases by 1,000. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 40) Aggregate output is ________ related to autonomous consumer expenditure, and is ________ related to planned investment spending. A) negatively; negatively B) negatively; positively C) positively; negatively D) positively; positively Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking

41) Aggregate output is ________ related to autonomous consumer expenditure, and is ________ related to the level of taxes. A) negatively; negatively B) negatively; positively C) positively; negatively D) positively; positively Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 42) Aggregate output is increased by a decrease in A) autonomous consumption. B) government spending. C) planned investment. D) net taxes. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 43) Equilibrium output is reduced by an increase in A) planned investment. B) taxes. C) government spending. D) net exports. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 44) Keynes believed that unstable investment caused the Great Depression. Using the simple Keynesian model, explain how a fall in investment affects equilibrium output. Answer: A fall in investment will reduce aggregate output by a greater amount that the initial fall in investment. This happens because of the multiplier effect. Ques Status: Previous Edition AACSB: Reflective Thinking

20.4 Understanding the IS Curve 1) If the interest rate falls, other things being equal, investment spending will A) fall. B) rise. C) either rise, fall, or remain unchanged. D) not be affected. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 2) When the interest rate rises A) planned investment falls. B) planned investment rises. C) planned investment will be unaffected. D) equilibrium income increases. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 3) When the interest rate is ________, ________ investments in physical capital will earn more than the cost of borrowed funds, so planned investment spending is ________. A) high; few; high B) high; few; low C) low; few; high D) low; many; low E) high; many; high Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 4) When interest rates rise in the United States (with the price level fixed), the value of the dollar ________, domestic goods become ________ expensive, and net exports ________. A) falls; less; fall B) falls; more; rise C) rises; more; fall D) rises; less; fall Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking

5) When interest rates fall in the United States (with the price level fixed), the value of the dollar ________, domestic goods become ________ expensive, and net exports ________. A) falls; less; fall B) falls; less; rise C) falls; more; fall D) rises; less; fall Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 6) An increase in interest rates A) increases the value of the dollar, net exports, and equilibrium output. B) increases the value of the dollar, reducing net exports and equilibrium output. C) reduces the value of the dollar, net exports, and equilibrium output. D) reduces the value of the dollar, increasing net exports and equilibrium output. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 7) A decrease in interest rates A) increases the value of the dollar, net exports, and equilibrium output. B) increases the value of the dollar, reducing net exports and equilibrium output. C) reduces the value of the dollar, net exports, and equilibrium output. D) reduces the value of the dollar, increasing net exports and equilibrium output. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 8) The negative relation between investment spending and the interest rate is what gives the ________ curve its ________ slope. A) IS; upward B) IS; downward C) LM; downward D) LM; upward Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 9) Points on the IS curve satisfy ________ market equilibrium. A) money B) goods C) stock D) bond Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 20 Copyright © 2019 Pearson Education, Inc.

10) The ________ traces out the points for which total quantity of goods produced equals total quantity of goods demanded. A) LM curve B) IS curve C) consumption function D) investment schedule Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 11) The ________ describes points for which the goods market is in equilibrium. A) LM curve B) IS curve C) consumption function D) investment schedule Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 12) Everything else held constant, if aggregate output is to the right of the IS curve, then there is an excess ________ of goods which will cause aggregate output to ________. A) supply; fall B) supply; rise C) demand; fall D) demand; rise Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 13) Everything else held constant, if aggregate output is to the left of the IS curve, then there is an excess ________ of goods which will cause aggregate output to ________. A) supply; fall B) supply; rise C) demand; fall D) demand; rise Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking

14) Everything else held constant, if aggregate output is to the ________ of the IS curve, then there is an excess supply of goods which will cause aggregate output to ________. A) right; fall B) right; rise C) left; fall D) left; rise Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 15) Everything else held constant, if aggregate output is to the ________ of the IS curve, then there is an excess demand of goods which will cause aggregate output to ________. A) right; fall B) right; rise C) left; fall D) left; rise Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 16) Everything else held constant, if aggregate output is to the ________ of the IS curve, then there is an excess ________ of goods which will cause aggregate output to fall. A) right; supply B) right; demand C) left; supply D) left; demand Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 17) Everything else held constant, if aggregate output is to the ________ of the IS curve, then there is an excess ________ of goods which will cause aggregate output to rise. A) right; supply B) right; demand C) left; supply D) left; demand Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking

18) The Federal Reserve increases interest rates when it wants to reduce aggregate demand to fight inflation. How do increases in the interest rate reduce aggregate demand? Answer: Increases in interest rates reduce planned investment. The decrease in investment reduces equilibrium output by a multiple amount due to the multiplier effect. Also, increases in interest rates increase the value of the dollar, reducing net exports, which reduce aggregate demand and equilibrium output by a multiple amount. Ques Status: Previous Edition AACSB: Analytical Thinking 20.5 Factors that Shift the IS Curve 1) Other things equal, a decrease in autonomous consumption shifts the ________ curve to the ________. A) IS; right B) IS; left C) LM; left D) LM; right Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 2) In the Keynesian cross diagram, a decline in autonomous consumer expenditure causes the aggregate demand function to shift ________ and the equilibrium level of aggregate output to ________, everything else held constant. A) up; rise B) up; fall C) down; rise D) down; fall Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 3) In the Keynesian cross diagram, an increase in autonomous consumer expenditure causes the aggregate demand function to shift ________ and the equilibrium level of aggregate output to ________, everything else held constant. A) up; rise B) up; fall C) down; rise D) down; fall Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking

4) In the Keynesian cross diagram, an increase in autonomous consumer expenditure causes the aggregate demand function to shift ________, the equilibrium level of aggregate output to rise, and the IS curve to shift to the ________, everything else held constant. A) up; left B) up; right C) down; left D) down; right Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 5) In the Keynesian cross diagram, a decline in autonomous consumer expenditure causes the aggregate demand function to shift ________, the equilibrium level of aggregate output to fall, and the IS curve to shift to the ________, everything else held constant. A) up; left B) up; right C) down; left D) down; right Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 6) In the Keynesian cross diagram, a decline in autonomous consumer expenditure causes the aggregate demand function to shift down, the equilibrium level of aggregate output to ________, and the IS curve to shift to the ________, everything else held constant. A) rise; left B) rise; right C) fall; left D) fall; right Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 7) In the Keynesian cross diagram, an increase in autonomous consumer expenditure causes the aggregate demand function to shift up, the equilibrium level of aggregate output to ________, and the IS curve to shift to the ________, everything else held constant. A) rise; left B) rise; right C) fall; left D) fall; right Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking

8) An increase in autonomous consumer expenditure causes the equilibrium level of aggregate output to ________ at any given interest rate and shifts the ________ curve to the ________, everything else held constant. A) rise; LM; right B) rise; IS; right C) fall; LM; left D) fall; IS; left Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 9) A decrease in autonomous consumer expenditure causes the equilibrium level of aggregate output to ________ at any given interest rate and shifts the ________ curve to the ________, everything else held constant. A) rise; LM; right B) rise; IS; right C) fall; IS; left D) fall; LM; left Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 10) Everything else held constant, changes in the interest rate affect planned investment spending and hence the equilibrium level of output, but this change in investment spending A) merely causes a movement along the IS curve and not a shift. B) is crowded out by higher taxes. C) is crowded out by higher government spending. D) is crowded out by lower consumer expenditures. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 11) A rise in autonomous planned investment spending causes the equilibrium level of aggregate output to ________ and shifts the ________ curve to the ________, everything else held constant. A) rise; LM; right B) rise; IS; right C) fall; IS; left D) fall; LM; left Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking

12) A decline in autonomous planned investment spending causes the equilibrium level of aggregate output to ________ and shifts the ________ curve to the ________, everything else held constant. A) rise; LM; right B) rise; IS; right C) fall; IS; left D) fall; LM; left Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 13) In the Keynesian cross diagram, a decrease in investment spending because companies become more pessimistic about investment profitability causes the aggregate demand function to shift ________ and the equilibrium level of aggregate output to ________, everything else held constant. A) up; rise B) up; fall C) down; rise D) down; fall Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 14) In the Keynesian cross diagram, an increase in investment spending because companies become more optimistic about investment profitability causes the aggregate demand function to shift ________ and the equilibrium level of aggregate output to ________, everything else held constant. A) up; rise B) up; fall C) down; rise D) down; fall Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 15) In the Keynesian cross diagram, an increase in investment spending because companies become more optimistic about investment profitability causes the aggregate demand function to shift ________, the equilibrium level of aggregate output to rise, and the IS curve to shift to the ________, everything else held constant. A) up; left B) up; right C) down; left D) down; right Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 26 Copyright © 2019 Pearson Education, Inc.

16) In the Keynesian cross diagram, a decrease in investment spending because companies become more pessimistic about investment profitability causes the aggregate demand function to shift ________, the equilibrium level of aggregate output to fall, and the IS curve to shift to the ________, everything else held constant. A) up; left B) up; right C) down; left D) down; right Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 17) In the Keynesian cross diagram, a decrease in investment spending because companies become more pessimistic about investment profitability causes the aggregate demand function to shift down, the equilibrium level of aggregate output to ________, and the IS curve to shift to the ________, everything else held constant. A) rise; left B) rise; right C) fall; left D) fall; right Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 18) In the Keynesian cross diagram, an increase in investment spending because companies become more optimistic about investment profitability causes the aggregate demand function to shift up, the equilibrium level of aggregate output to ________, and the IS curve to shift to the ________, everything else held constant. A) rise; left B) rise; right C) fall; left D) fall; right Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 19) A decrease in autonomous planned investment spending, other things equal, shifts the ________ curve to the ________. A) IS; right B) IS; left C) LM; left D) LM; right Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking

20) An increase in government spending causes the equilibrium level of aggregate output to ________ at any given interest rate and shifts the ________ curve to the ________, everything else held constant. A) rise; LM; right B) rise; IS; right C) fall; IS; left D) fall; LM; left Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 21) A reduction in government spending causes the equilibrium level of aggregate output to ________ at any given interest rate and shifts the ________ curve to the ________, everything else held constant. A) rise; LM; right B) fall; IS; left C) fall; LM; left D) rise; IS; right Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 22) The IS curve shifts to the left when A) taxes increase. B) government spending increases. C) the money supply increases. D) autonomous planned investment spending increases. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 23) A decline in taxes ________ consumer expenditure and shifts the ________ curve to the ________, everything else held constant. A) raises; LM; right B) lowers; IS; left C) raises; IS; right D) lowers; LM; left Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking

24) A tax increase ________ disposable income, ________ consumption expenditure, and shifts the IS curve to the ________, everything else held constant. A) increases; increases; right B) increases; decreases; left C) decreases; increases; left D) decreases; decreases; left Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 25) A tax cut ________ disposable income, ________ consumption expenditure, and shifts the IS curve to the ________, everything else held constant. A) increases; increases; right B) increases; decreases; right C) decreases; increases; left D) decreases; decreases; left Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 26) If American college students decide that drinking Mexican-brewed beer helps one get noticed, net exports will tend to fall, causing aggregate demand to ________ and the ________ curve to shift to the left, everything else held constant. A) fall; LM B) fall; IS C) rise; LM D) rise; IS Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 27) If young business professionals in America suddenly decide that driving German-made cars is an important status symbol, net exports will tend to ________ causing aggregate demand to ________, everything else held constant. A) fall; fall B) fall; rise C) rise; fall D) rise; rise Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking

28) An autonomous depreciation of the U.S. dollar makes American goods ________ relative to foreign goods and results in a ________ in U.S. net exports, everything else held constant. A) cheaper; decline B) cheaper; rise C) more expensive; decline D) more expensive; rise Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 29) An autonomous appreciation of the U.S. dollar makes American goods ________ expensive relative to foreign goods which ________ net exports in the U.S. A) less; decreases B) less; increases C) more; decreases D) more; increases Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 30) A shift in tastes toward foreign goods ________ net exports in the U.S. and causes the quantity of aggregate output demanded to ________ in the U.S., everything else held constant. A) decreases; rise B) decreases; fall C) increases; rise D) increases; fall Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 31) Everything else held constant, a shift in tastes in the U.S. toward Mexican goods will ________ net exports in the U.S. and cause the quantity of aggregate output demanded to ________ in Mexico. A) decrease; rise B) decrease; fall C) increase; rise D) increase; fall Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking

32) A shift in tastes toward American goods ________ net exports in the U.S. and causes the quantity of aggregate output demanded to ________ in the U.S., everything else held constant. A) decreases; rise B) decreases; fall C) increases; rise D) increases; fall Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 33) Everything else held constant, a shift in tastes in the U.S. towards American goods will ________ net exports in the U.S. and cause the quantity of aggregate output demanded to ________ in Mexico. A) decrease; rise B) decrease; fall C) increase; rise D) increase; fall Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 34) A shift in tastes toward American goods ________ net exports in the U.S. and causes the IS curve to shift to the ________ in the U.S., everything else held constant. A) decreases; right B) decreases; left C) increases; right D) increases; left Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 35) A shift in tastes toward foreign goods ________ net exports in the U.S. and causes the IS curve to shift to the ________ in the U.S., everything else held constant. A) decreases; right B) decreases; left C) increases; right D) increases; left Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking

36) A depreciation of the U.S. dollar makes American goods cheaper relative to foreign goods, resulting in a ________ in net exports in the U.S. and a ________ shift of the IS curve in the U.S., everything else held constant. A) fall; leftward B) rise; leftward C) fall; rightward D) rise; rightward Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 37) An appreciation of the U.S. dollar makes foreign goods cheaper relative to American goods, resulting in a ________ in net exports in the U.S. and a ________ shift of the IS curve in the U.S., everything else held constant. A) fall; leftward B) rise; leftward C) fall; rightward D) rise; rightward Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 38) Which of the following does NOT shift the IS curve? A) an increase in autonomous consumption B) an increase in government spending C) a decline in government spending D) a fall in the interest rate Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking

Economics of Money, Banking, and Financial Markets, 12e (Mishkin) Chapter 21 The Monetary Policy and Aggregate Demand Curves 21.1 The Federal Reserve and Monetary Policy 1) Because prices are slow to move in the short-run, when the Federal Reserve lowers the federal funds rate A) nominal interest rates rise. B) real interest rates fall. C) inflation falls. D) real interest rates rise. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 2) Because prices are sticky in the short-run, when the Federal Reserve raises the federal funds rate A) nominal interest rates fall. B) real interest rates rise. C) inflation falls. D) real interest rates fall. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 21.2 The Monetary Policy Curve 1) The monetary policy (MP) curve indicates the relationship between A) the Federal Funds Rate and the real interest rate. B) the Federal Funds Rate and the inflation rate. C) the inflation rate and the expected inflation rate. D) the real interest rate the central bank sets and the inflation rate. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 2) The upward slope of the MP curve indicates that A) the central bank lowers real interest rates when inflation rises. B) the central bank raises real interest rates when inflation falls. C) the central bank raises nominal interest rates when inflation rises. D) the central bank raises real interest rates when inflation rises. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking

3) The Taylor Principle states that central banks raise nominal rates by ________ than any rise in expected inflation so that real interest rates ________ when there is a rise in inflation. A) less; rise B) more; fall C) less; fall D) more; rise Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 4) An autonomous tightening of monetary policy A) causes an upward movement along the monetary policy curve. B) causes a downward movement along the monetary policy curve. C) shifts the monetary policy curve upward. D) shifts the monetary policy curve downward. Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 5) An autonomous easing of monetary policy A) causes an upward movement along the monetary policy curve. B) causes a downward movement along the monetary policy curve. C) shifts the monetary policy curve upward. D) shifts the monetary policy curve downward. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 6) Based on the Taylor Principle, a central bank's endogenous response of raising interest rates when inflation rises A) causes an upward movement along the monetary policy curve. B) causes a downward movement along the monetary policy curve. C) shifts the monetary policy curve upward. D) shifts the monetary policy curve downward. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 7) Based on the Taylor Principle, a central bank's endogenous response of decreasing interest rates when inflation falls A) causes an upward movement along the monetary policy curve. B) causes a downward movement along the monetary policy curve. C) shifts the monetary policy curve upward. D) shifts the monetary policy curve downward. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 2 Copyright © 2019 Pearson Education, Inc.

8) Inflationary pressures caused the FOMC to increase the federal funds rate by ¼ of a percentage point in June 2004, and by exactly the same amount at every subsequent FOMC meeting through June of 2006. Theses actions A) caused an upward movement along the monetary policy curve. B) caused a downward movement along the monetary policy curve. C) shifted the monetary policy curve upward. D) shifted the monetary policy curve downward. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 9) The Fed's policy actions of reacting to higher inflation by raising the real interest rate during 2004-2006 were A) upward movements along the monetary policy curve. B) downward movement along the monetary policy curve. C) upward shifts of the monetary policy curve. D) downward shifts of the monetary policy curve. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 10) When the financial crisis started in August 2007, inflation was rising and the Fed began an aggressive easing lowering of the federal funds rate, which indicated that A) the Fed pursued an autonomous monetary policy tightening. B) the Fed pursued an autonomous monetary policy easing. C) the Fed had an automatic negative response to inflation based on the Taylor rule. D) the Fed had an automatic positive response to inflation based on the Taylor rule. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 11) When the financial crisis started in August 2007, inflation was rising and the Fed began an aggressive easing lowering of the federal funds rate, which indicated that A) there was an upward movement along the monetary policy curve. B) there was a downward movement along the monetary policy curve. C) the monetary policy curve shifted upward. D) the monetary policy curve shifted downward. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking

21.3 The Aggregate Demand Curve 1) In deriving the aggregate demand curve a ________ inflation rate leads the central bank to ________ real interest rates, thereby ________ the level of equilibrium aggregate output. A) higher; raise; lowering B) lower; raise; lowering C) higher; lower; lowering D) higher; lower; raising Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 2) The aggregate demand curve is downward sloping because a higher inflation rate leads the central bank to raise ________ interest rates, thereby ________ the level of equilibrium aggregate output., everything else held constant. A) real; lowering B) real; raising C) nominal; lowering D) nominal; raising Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 3) The aggregate demand curve is downward sloping because a higher inflation rate leads the central bank to ________ real interest rates, thereby ________ the level of equilibrium aggregate output., everything else held constant. A) raise; lowering B) raise; raising C) reduce; lowering D) reduce; raising Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 4) Everything else held constant, an increase in government spending will cause A) aggregate demand to increase. B) aggregate demand to decrease. C) the quantity of aggregate demand to increase. D) the quantity of aggregate demand to decrease. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking

5) Everything else held constant, an autonomous easing of monetary policy will cause A) the quantity of aggregate demand to increase. B) the quantity of aggregate demand to decrease. C) aggregate demand to decrease. D) aggregate demand to increase. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 6) Everything else held constant, an autonomous tightening of monetary policy will cause A) the quantity of aggregate demand to increase. B) the quantity of aggregate demand to decrease. C) aggregate demand to increase. D) aggregate demand to decrease. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 7) Everything else held constant, an autonomous easing of monetary policy will cause A) aggregate demand to increase. B) aggregate demand to decrease. C) the quantity of aggregate demand to increase. D) the quantity of aggregate demand to decrease. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 8) Everything else held constant, an increase in autonomous consumer spending will cause the IS curve to shift to the ________ and aggregate demand will ________. A) right; increase B) right; decrease C) left; increase D) left; decrease Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 9) Everything else held constant, a decrease in autonomous consumer spending will cause the IS curve to shift to the ________ and aggregate demand will ________. A) right; increase B) right; decrease C) left; increase D) left; decrease Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 5 Copyright © 2019 Pearson Education, Inc.

10) Everything else held constant, an increase in autonomous planned investment spending will cause the IS curve to shift to the ________ and aggregate demand will ________. A) right; increase B) right; decrease C) left; increase D) left; decrease Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 11) Everything else held constant, a decrease in autonomous planned investment spending will cause the IS curve to shift to the ________ and aggregate demand will ________. A) right; increase B) right; decrease C) left; increase D) left; decrease Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 12) Everything else held constant, a decrease in net taxes will cause the IS curve to shift to the ________ and aggregate demand will ________. A) right; increase B) right; decrease C) left; increase D) left; decrease Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 13) Everything else held constant, an increase in net taxes will cause the IS curve to shift to the ________ and aggregate demand will ________. A) right; increase B) right; decrease C) left; increase D) left; decrease Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking

14) Everything else held constant, an appreciation of the domestic currency will cause the IS curve to shift to the ________ and aggregate demand will ________. A) right; increase B) right; decrease C) left; increase D) left; decrease Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 15) Everything else held constant, a depreciation of the domestic currency will cause the IS curve to shift to the ________ and aggregate demand will ________. A) right; increase B) right; decrease C) left; increase D) left; decrease Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 16) Everything else held constant, a decrease in government spending will cause the IS curve to shift to the ________ and aggregate demand will ________. A) right; increase B) right; decrease C) left; increase D) left; decrease Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking

Economics of Money, Banking, and Financial Markets, 12e (Mishkin) Chapter 22 Aggregate Demand and Supply Analysis 22.1 Aggregate Demand 1) The aggregate demand curve is the total quantity of an economy's A) intermediate goods demanded at different inflation rates. B) intermediate goods demanded at a particular inflation rate. C) final goods and services demanded at a particular inflation rate. D) final goods and services demanded at different inflation rates. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 2) The total quantity of an economy's final goods and services demanded at different inflation rates is A) the aggregate supply curve. B) the aggregate demand curve. C) the Phillips curve. D) the aggregate expenditure function. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 3) One way to derive aggregate demand is by looking at its four component parts, which are A) consumer expenditures, planned investment spending, government spending, and net exports. B) consumer expenditures, actual investment spending, government spending, and net exports. C) consumer expenditures, planned investment spending, government spending, and gross exports. D) consumer expenditures, planned investment spending, government spending, and taxes. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 4) By analyzing aggregate demand through its component parts, we can conclude that, everything else held constant, a decline in the inflation rate causes A) an increase in real interest rates, an increase in investment spending, and a decline in aggregate output demand. B) a decline in real interest rates, a decrease in investment spending, and an increase in aggregate output demand. C) a decline in real interest rates, an increase in investment spending, and an increase in aggregate output demand. D) an increase in real interest rates, a decline in investment spending, and a decline in aggregate output demand. Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 1 Copyright © 2019 Pearson Education, Inc.

5) By looking at aggregate demand via its component parts, we can conclude that the aggregate demand curve is downward sloping because A) a lower inflation rate causes the real interest rate to fall, and stimulates planned investment spending. B) a lower inflation rate causes the real interest rate to rise, and stimulates planned investment spending. C) a higher inflation rate causes the real interest rate to fall, and stimulates planned investment spending. D) a higher inflation rate causes the real interest rate to rise, and stimulates planned investment spending. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 6) Which of the followings is NOT true about the word "autonomous" that economists use? A) Changes in autonomous components are associated with movements along a curve. B) Changes in autonomous components are associated with shifts of a curve. C) The autonomous component of a variable is exogenous. D) The autonomous component of a variable is independent of other variables in the model. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 7) Which of the followings is NOT true about the word "autonomous" that economists use? A) Changes in autonomous components are associated with shifts of a curve. B) The autonomous component of a variable is exogenous. C) The autonomous component of a variable is independent of other variables in the model. D) The autonomous component of a variable is induced by other variables in the model. Answer: D Ques Status: Previous Edition AACSB: Application of Knowledge 8) Everything else held constant, an autonomous monetary policy easing ________ aggregate ________. A) increases; demand B) decreases; demand C) decreases; supply D) increases; supply Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking

9) Everything else held constant, an autonomous monetary policy tightening ________ aggregate ________. A) increases; demand B) decreases; demand C) decreases; supply D) increases; supply Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 10) Everything else held constant, when financial frictions increase, the real cost of borrowing ________ so that planned investment spending ________ at any given inflation rate. A) increases; falls B) decreases; falls C) decreases; rises D) increases; rises Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 11) Everything else held constant, an increase in financial frictions ________ aggregate ________. A) increases; demand B) decreases; demand C) decreases; supply D) increases; supply Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 12) Everything else held constant, an increase in government spending ________ aggregate ________. A) increases; demand B) decreases; demand C) decreases; supply D) increases; supply Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking

13) Everything else held constant, a decrease in government spending ________ aggregate ________. A) increases; demand B) decreases; demand C) decreases; supply D) increases; supply Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 14) Everything else held constant, a decrease in net taxes ________ aggregate ________. A) increases; demand B) decreases; demand C) decreases; supply D) increases; supply Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 15) Everything else held constant, an increase in net taxes ________ aggregate ________. A) increases; demand B) decreases; demand C) decreases; supply D) increases; supply Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 16) Everything else held constant, a balanced budget increase in government spending (that is, an increase in government spending that is matched by an identical increase in net taxes) will A) increase aggregate demand, but not by as much as if just government spending increases. B) increase aggregate demand by more than if just government spending increases. C) not affect aggregate demand. D) decrease aggregate demand. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 17) Everything else held constant, an increase in net exports ________ aggregate ________. A) increases; demand B) decreases; demand C) decreases; supply D) increases; supply Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 4 Copyright © 2019 Pearson Education, Inc.

18) Everything else held constant, a decrease in net exports ________ aggregate ________. A) increases; demand B) decreases; demand C) decreases; supply D) increases; supply Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 19) Everything else held constant, an increase in planned investment expenditure ________ aggregate ________. A) increases; demand B) decreases; demand C) decreases; supply D) increases; supply Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 20) Everything else held constant, a decrease in planned investment expenditure ________ aggregate ________. A) increases; demand B) decreases; demand C) decreases; supply D) increases; supply Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 21) Everything else held constant, aggregate demand increases when A) taxes are cut. B) government spending is reduced. C) animal spirits decrease. D) the money supply is reduced. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 22) Everything else held constant, aggregate demand increases when A) net exports decrease. B) taxes increase. C) planned investment spending increases. D) the money supply decreases. Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 5 Copyright © 2019 Pearson Education, Inc.

23) Everything else held constant, which of the following does NOT cause aggregate demand to increase? A) an increase in net exports B) an increase in government spending C) an increase in taxes D) an increase in consumer optimism Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 24) Explain through the component parts of aggregate demand why the aggregate demand curve slopes down with respect to the inflation rate. Be sure to discuss two channels through which changes in inflation rates affect demand. Answer: A fall in the inflation rate lowers real interest rates. Lower rates increase investment, thereby increasing aggregate demand. Lower interest rates also cause depreciation of the domestic currency, increasing net exports and aggregate demand. Ques Status: Previous Edition AACSB: Reflective Thinking 22.2 Aggregate Supply 1) The aggregate supply curve is the total quantity of A) raw materials offered for sale at different inflation rates. B) final goods and services offered for sale at the current inflation rate. C) final goods and services offered for sale at different inflation rates. D) intermediate and final goods and service offered for sale at different inflation rates. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 2) The aggregate supply curve shows the relationship between A) the level of inputs and aggregate output. B) the inflation rate and the level of inputs. C) the wage rate and the level of employment. D) the inflation rate and the level of aggregate output supplied. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 3) The long-run rate of unemployment to which an economy always gravitates is the A) normal rate of unemployment. B) natural rate of unemployment. C) neutral rate of unemployment. D) inflationary rate of unemployment. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 6 Copyright © 2019 Pearson Education, Inc.

4) The long-run aggregate supply curve is A) a vertical line through the non-inflationary rate of output. B) a vertical line through the current level of output. C) a vertical line through the natural rate level of output. D) a horizontal line through the current level of output. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 5) The long-run aggregate supply curve is a vertical line passing through A) the natural rate of output. B) the natural-rate price level. C) the actual rate of unemployment. D) the expected rate of inflation. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 6) ________ flexible wages and prices imply that the short-run aggregate supply curve is ________. A) More; flatter B) Less; steeper C) Less; vertical D) More; steeper Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 7) Everything else held constant, when actual output exceeds the natural rate of output ________ aggregate supply ________. A) short-run; decreases B) short-run; increases C) long-run; increases D) long-run; decreases Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 8) Everything else held constant, if workers expect an increase in inflation, ________ aggregate supply ________. A) long-run; increases B) long-run; decreases C) short-run; decreases D) short-run; increases Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 7 Copyright © 2019 Pearson Education, Inc.

9) Everything else held constant, a change in workers' expectations about inflation will cause ________ to change. A) aggregate demand B) short-run aggregate supply C) the production function D) long-run aggregate supply Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 10) Which of the following increases aggregate supply in the short-run, everything else held constant? A) an increase in the price of crude oil B) a successful wage push by workers C) expectations of a higher inflation D) a technological improvement that increases worker productivity Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 22.3 Shifts in Aggregate Supply Curves 1) The long-run aggregate supply curve shifts to the right when there is A) a decrease in the total amount of capital in the economy. B) a decrease in the total amount of labor supplied in the economy. C) a decrease in the available technology. D) a decline in the natural rate of unemployment. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 2) The long-run aggregate supply curve shifts to the right when there is A) an increase in the total amount of capital in the economy. B) an increase in the available technology. C) a decrease in the natural rate of unemployment. D) A and B. E) A, B, and C. Answer: E Ques Status: Previous Edition AACSB: Analytical Thinking

3) The short-run aggregate supply curve shifts to the right when A) output gap is higher. B) output gap is lower. C) expected inflation is higher. D) expected inflation is lower. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 4) Which of the followings does NOT shift the short-run aggregate supply curve? A) supply shocks. B) persistent positive output gap. C) changes in expected inflation. D) an increase in output gap. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 22.4 Equilibrium in Aggregate Demand and Supply Analysis 1) The fact that an economy always returns to the natural rate level of output is known as A) the excess demand hypothesis. B) the price-adjustment mechanism. C) the self-correcting mechanism. D) the natural rate of unemployment. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 2) Assuming the economy is starting at the natural rate of output and everything else held constant, the effect of ________ in aggregate ________ is a rise in both inflation and output in the short-run, but in the long-run the only effect is a rise in inflation. A) a decrease; supply B) a decrease; demand C) an increase; supply D) an increase; demand Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking

3) Suppose the economy is producing at the natural rate of output. Assuming a fixed natural rate of output and everything else held constant, the development of a new, more productive technology will cause ________ in the unemployment rate in the short run and ________ in inflation in the short run. A) an increase; an increase B) a decrease; a decrease C) a decrease; an increase D) no change; no change Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 4) Suppose the economy is producing at the natural rate of output. Assuming a fixed natural rate of output and everything else held constant, the development of a new, more productive technology will cause ________ in the unemployment rate in the long run and ________ in inflation in the short run. A) an increase; an increase B) a decrease; a decrease C) no change; a decrease D) no change; no change Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 5) Suppose the economy is producing at the natural rate of output. Assuming a fixed natural rate of output and everything else held constant, the development of a new, more productive technology will cause ________ in the unemployment rate and ________ in the inflation in the long run. A) an increase; an increase B) a decrease; a decrease C) a decrease; an increase D) no change; no change Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking

22.5 Changes in Equilibrium: Aggregate Demand Shocks 1) Suppose the economy is producing at the natural rate of output. An increase in consumer and business confidence will cause ________ in real GDP in the short run and ________ in inflation in the short run, everything else held constant. A) an increase; an increase B) a decrease; a decrease C) no change; an increase D) no change; a decrease Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 2) Suppose the economy is producing at the natural rate of output. An increase in consumer and business confidence will cause ________ in real GDP in the long run and ________ in inflation in the long run, everything else held constant. A) an increase; an increase B) a decrease; a decrease C) no change; an increase D) no change; a decrease Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 3) Suppose the economy is producing at the natural rate of output. A decrease in consumer and business confidence will cause ________ in real GDP in the short run and ________ in inflation in the short run, everything else held constant. A) an increase; an increase B) a decrease; a decrease C) no change; an increase D) no change; a decrease Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 4) Suppose the economy is producing at the natural rate of output. A decrease in consumer and business confidence will cause ________ in real GDP in the long run and ________ in inflation in the long run, everything else held constant. A) an increase; an increase B) a decrease; a decrease C) no change; an increase D) no change; a decrease Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking

5) Suppose the economy is producing at the natural rate of output. An open market purchase of bonds by the Fed will cause ________ in real GDP the the short run and ________ in inflation in the short run, everything else held constant. A) an increase; an increase B) a decrease; a decrease C) no change; an increase D) no change; a decrease Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 6) Suppose the economy is producing at the natural rate of output. An open market purchase of bonds by the Fed will cause ________ in real GDP in the long run and ________ in inflation in the long run, everything else held constant. A) an increase; an increase B) a decrease; a decrease C) no change; an increase D) no change; a decrease Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 7) Suppose the economy is producing at the natural rate of output. An open market sale of bonds by the Fed will cause ________ in real GDP in the short run and ________ in inflation in the short run, everything else held constant. A) an increase; an increase B) a decrease; a decrease C) no change; an increase D) no change; a decrease Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 8) Suppose the economy is producing at the natural rate of output. An open market sale of bonds by the Fed will cause ________ in real GDP in the long run and ________ in inflation in the long run, everything else held constant. A) an increase; an increase B) a decrease; a decrease C) no change; an increase D) no change; a decrease Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking

9) Suppose the U.S. economy is producing at the natural rate of output. A depreciation of the U.S. dollar will cause ________ in real GDP in the short run and ________ in inflation in the short run, everything else held constant. (Assume the depreciation causes no effects in the supply side of the economy.) A) an increase; an increase B) a decrease; a decrease C) no change; an increase D) no change; a decrease Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 10) Suppose the U.S. economy is producing at the natural rate of output. A depreciation of the U.S. dollar will cause ________ in real GDP in the short run and ________ in inflation in the long run, everything else held constant. (Assume the depreciation causes no effects in the supply side of the economy.) A) an increase; an increase B) a decrease; a decrease C) no change; an increase D) no change; a decrease Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 11) Suppose the U.S. economy is producing at the natural rate of output. An appreciation of the U.S. dollar will cause ________ in real GDP in the short run and ________ in inflation in the short run, everything else held constant. (Assume the appreciation causes no effects in the supply side of the economy.) A) an increase; an increase B) a decrease; a decrease C) no change; an increase D) no change; a decrease Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 12) Suppose the U.S. economy is producing at the natural rate of output. An appreciation of the U.S. dollar will cause ________ in real GDP in the short run and ________ in inflation in the long run, everything else held constant. (Assume the appreciation causes no effects in the supply side of the economy.) A) an increase; an increase B) a decrease; a decrease C) no change; an increase D) no change; a decrease Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 13 Copyright © 2019 Pearson Education, Inc.

13) Suppose the economy is producing below the natural rate of output and the government is suffering from large budget deficits. To deal with the deficit problem, suppose the government takes a policy action to reduce the size of the deficits. This policy action will cause ________ in the unemployment rate in the short run and ________ in inflation in the short run, everything else held constant. A) an increase; an increase B) a decrease; a decrease C) a decrease; an increase D) an increase; a decrease Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 14) According to aggregate demand and supply analysis, the negative demand shock of 20002004 had the effect of A) increasing aggregate output, lowering unemployment, and raising inflation. B) decreasing aggregate output, raising unemployment, and raising inflation. C) increasing aggregate output, lowering unemployment, and lowering inflation. D) decreasing aggregate output, raising unemployment, and lowering inflation. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking

15) Using the aggregate demand-aggregate supply model, explain and demonstrate graphically the short-run and long-run effects of an increase in the money supply. Answer: See figure below.

An increase in the money supply increases aggregate demand, from AD to AD'. The economy moves from point 1 to point 2. In the short run both inflation rate and real output increase. In the long run, wages adjust, decreasing short-run aggregate supply, to AS', raising prices further and reducing real output until the economy returns to the natural level of output. The long-run result is to only increase inflation. The path is from 1 to 2 to 3. Ques Status: Previous Edition AACSB: Reflective Thinking

22.6 Changes in Equilibrium: Aggregate Supply (Price) Shocks 1) Everything else held constant, an increase in the cost of production ________ aggregate ________. A) increases; demand B) decreases; demand C) increases; supply D) decreases; supply Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 2) Everything else held constant, a decrease in the cost of production ________ aggregate ________. A) increases; demand B) decreases; demand C) increases; supply D) decreases; supply Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 3) Everything else held constant, when output is ________ the natural rate level, wages will begin to ________, increasing short-run aggregate supply. A) above; fall B) above; rise C) below; fall D) below; rise Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 4) Everything else held constant, when output is ________ the natural rate level, wages will begin to ________, decreasing short-run aggregate supply. A) above; fall B) above; rise C) below; fall D) below; rise Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking

5) If workers demand and receive higher real wages (a successful wage push), the cost of production ________ and the short-run aggregate supply curve shifts ________. A) rises; leftward B) rises; rightward C) falls; leftward D) falls; rightward Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 6) A decrease in the availability of raw materials that increases the price level is called a ________ shock A) negative demand B) positive demand C) negative supply D) positive supply Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 7) A negative supply shock causes ________ to ________. A) aggregate demand; increase B) aggregate demand; decrease C) short-run aggregate supply; decrease D) short-run aggregate supply; increase Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 8) A positive supply shock causes ________ to ________. A) aggregate demand; increase B) aggregate demand; decrease C) short-run aggregate supply; decrease D) short-run aggregate supply; increase Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking

9) Suppose the economy is producing at the natural rate of output and the government passes legislation that severely restricts a company's ability to reduce production costs via outsourcing. Everything else held constant, this policy action will cause ________ in the unemployment rate in the short run and ________ in inflation in the short run. A) an increase; an increase B) a decrease; a decrease C) a decrease; an increase D) no change; no change Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 10) Suppose the U.S. economy is operating at potential output. A negative supply shock that is accommodated by an open market purchase by the Federal Reserve will cause ________ in real GDP in the long run and ________ in inflation in the long run, everything else held constant. A) no change; an increase B) no change; a decrease C) an increase; an increase D) a decrease; a decrease Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 11) A theory of aggregate economic fluctuations called real business cycle theory holds that A) changes in the real money supply are the only demand shocks that affect the natural rate of output. B) aggregate demand shocks do affect the natural rate of output. C) aggregate supply shocks do affect the natural rate of output. D) changes in net exports are the only demand shocks that affect the natural rate of output. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 12) This theory views shocks to tastes (workers' willingness to work, for example) and technology (productivity) as the major driving forces behind short-run fluctuations in the business cycle because these shocks lead to substantial short-run fluctuations in the natural rate of output. A) the natural rate hypothesis B) hysteresis C) real business cycle theory D) the Phillips curve model Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking

13) Because shifts in aggregate demand are not viewed as being particularly important to aggregate output fluctuations, they do not see much need for activist policy to eliminate high unemployment. "They" refers to proponents of A) the natural rate hypothesis. B) monetarism. C) the Phillips curve model. D) real business cycle theory. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 14) According to aggregate demand and supply analysis, America's involvement in the Vietnam War had the effect of A) increasing aggregate output, lowering unemployment, and raising the inflation. B) decreasing aggregate output, lowering unemployment, and lowering the inflation. C) increasing aggregate output, raising unemployment, and raising the inflation. D) decreasing aggregate output, raising unemployment, and lowering the inflation. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 15) According to aggregate demand and supply analysis, the negative supply shocks of 19731975 and 1978-1980 had the effect of A) increasing aggregate output, lowering unemployment, and raising the inflation. B) decreasing aggregate output, raising unemployment, and raising the inflation. C) increasing aggregate output, raising unemployment, and raising the inflation. D) decreasing aggregate output, raising unemployment, and lowering the inflation. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 16) According to aggregate demand and supply analysis, the favorable supply shock of 19951999 had the effect of A) increasing aggregate output, lowering unemployment, and raising inflation. B) decreasing aggregate output, raising unemployment, and raising inflation. C) increasing aggregate output, lowering unemployment, and lowering inflation. D) decreasing aggregate output, raising unemployment, and lowering inflation. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking

17) According to aggregate demand and supply analysis, the rising oil prices coupled with the global financial crisis in 2007-2008 caused the unemployment rate to ________ and the level of real aggregate output to ________. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 18) Explain and demonstrate graphically the effects of a negative supply shock in both the shortrun and long-run. Answer: See figure below.

The supply shock decreases short-run aggregate supply from AS1 to AS2, reducing real output and raising inflation rate, or from points 1 to 2 in the graph. In the long run, the supply curve eventually adjusts back to the original position as wages fall. The economy adjusts from 2 back to 1. Ques Status: Previous Edition AACSB: Reflective Thinking

22.7 AD/AS Analysis of Foreign Business Cycle Episodes 1) The price of a barrel of oil doubled between 2007 and the middle of 2008. To make matters worse, a financial crisis hit the U.S. economy starting in August of 2007. Which of the following is an appropriate description of the mechanism that would have ensued? A) The increase in the price of oil would have immediately shifted the AS curve to the right. B) The financial crisis would have led to a sharp contraction in spending shifting the AD curve to the right. C) Shifts in both the AD and the AS curve would have ensued in the short-run but as long as neither shock had an impact on potential output, ultimately unemployment will have been unaffected in the long run. D) All of the above. E) None of the above. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 2) The price of a barrel of oil doubled between 2007 and the middle of 2008. To make matters worse, a financial crisis hit the U.S. economy starting in August of 2007. Which of the following is TRUE of the United Kingdom's experience? A) The increase in the price of oil immediately shifted the AS curve to the left. B) The financial crisis did not take hold right away so the AD curve did not immediately shift. C) Eventually, the Lehman Brothers bankruptcy caused a negative demand shock leading to a further fall in output and an increase in the unemployment rate. D) All of the above. E) None of the above. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 3) The price of a barrel of oil doubled between 2007 and the middle of 2008. To make matters worse, a financial crisis hit the U.S. economy starting in August of 2007. Which of the following is TRUE of the Chinese experience? A) The worldwide decline in demand led to a collapse of Chinese exports. B) Instead of relying solely on the economy's self-correcting mechanism, much more aggressive fiscal expansions than those of the U.S. (in addition to a substantial monetary easing) served to shift the AD curve back to general equilibrium relatively quickly. C) The Chinese economy was better able than the U.S. economy to weather the financial crisis with output growth starting to grow earlier and more quickly than that of the U.S. D) All of the above. E) None of the above. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking

4) In the long run, following a combination of a negative demand shock and a temporary negative supply shock, A) both inflation and output return to the original long-run equilibrium values. B) inflation is permanently increased, while output returns to potential output. C) output returns to potential output, while inflation may be higher or lower than its initial value. D) inflation is permanently reduced, while output returns to potential output. E) None of the above. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 5) As of 2009, China's economy had recovered from the global recession that began in 2008. Use aggregate demand and aggregate supply analysis to explain why, and to explain the likely consequences for China of an increase in the growth rate of the global economy. Answer: Policy in China reversed the decline in aggregate demand, substituting fiscal and monetary stimulus for the reduced demand for China's exports. The result was a rapid recovery of output and avoidance of downward shifts of the short-run aggregate supply curve that would have meant declining inflation. With output at or near potential in China, the rise in exports that will accompany faster growth of the global economy will cause a positive output gap and accelerating inflation, unless policy makers in China can again intervene with policies to counteract the positive output gap. Ques Status: Previous Edition AACSB: Reflective Thinking 22.8 Appendix: The Phillips Curve and the Short-Run Aggregate Supply Curve 1) The Phillips curve indicates that when the labor market is ________, production costs will ________ and aggregate supply increases. A) easy; rise B) easy; fall C) tight; fall D) tight; rise Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 2) The Phillips curve indicates that when the labor market is ________, production costs will ________ and aggregate supply decreases. A) easy; rise B) easy; fall C) tight; fall D) tight; rise Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking

3) The expectations-augmented Phillips curve implies that as expected inflation increases, nominal wages ________ to prevent real wages from ________. A) fall; rising B) fall; falling C) rise; falling D) rise; rising Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 22.9 Web Appendix 1: The Effects of Macroeconomic Shocks on Asset Prices 1) An autonomous monetary policy easing temporarily ________ real interest rates and ________ aggregate output in the short run, but in the long run real interest rates and aggregate output return to the equilibrium levels. A) reduces; raises B) reduces; lowers C) increases; lowers D) increases; raises Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 2) An autonomous monetary policy easing reduces real interest rates and raises aggregate output ________ and the inflation rate rises ________. A) temporarily; permanently B) permanently; temporarily C) permanently; permanently D) temporarily; temporarily Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 3) Monetary policy authorities can affect real interest rates A) in the short run, but not in the long run. B) in the long run, but not in the short run. C) permanently. D) both in the long run and the short run. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking

4) positive spending shocks lead to ________ real interest rates ________. A) higher; in both the short and long runs B) higher; in the short run but not in the long run C) lower; in both the short and long runs D) lower; in the short run but not in the long run Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 5) Positive spending shocks lead to ________ output ________. A) higher; in both the short and long runs B) higher; in the short run but not in the long run C) lower; in both the short and long runs D) lower; in the short run but not in the long run Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 6) Positive spending shocks lead to ________ inflation ________. A) higher; in both the short and long runs B) higher; in the short run but not in the long run C) lower; in both the short and long runs D) lower; in the short run but not in the long run Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 7) A temporary supply shock that raises prices will cause the real interest rate to A) rise in both the short and long runs. B) rise in the short run but not in the long run. C) fall in both the short and long runs. D) fall in the short run but not in the long run. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 8) A temporary supply shock that raises prices A) will cause the real interest rate to rise in the long run. B) has no long-run impact on inflation and output. C) causes output to fall in the long run. D) causes inflation to rise in the long run. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking

9) A permanent negative supply shock leads to ________ real interest rates ________. A) higher; in both the short and long runs B) higher; in the short run but not in the long run C) lower; in both the short and long runs D) lower; in the short run but not in the long run Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 10) A permanent negative supply shock leads to ________ output ________. A) higher; in both the short and long runs B) higher; in the short run but not in the long run C) lower; in both the short and long runs D) lower; in the short run but not in the long run Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 11) A permanent negative supply shock leads to ________ inflation ________. A) higher; in both the short and long runs B) higher; in the short run but not in the long run C) lower; in both the short and long runs D) lower; in the short run but not in the long run Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 12) An autonomous monetary policy easing ________ real interest rates and ________ output in the short run, thereby ________ stock prices. A) raises; lowers; lowering B) raises; raises; raising C) lowers; raises; raising D) lowers; raises; lowering Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 13) A positive spending shock ________ real interest rates and ________ output in the short run, thereby its effect on stock prices is ________. A) raises; lowers; positive B) raises; raises; ambiguous C) lowers; raises; negative D) lowers; raises; positive Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 25 Copyright © 2019 Pearson Education, Inc.

14) A temporary negative supply shock ________ real interest rates and ________ output in the short run, thereby its effect on stock prices is ________. A) raises; lowers; negative B) raises; raises; ambiguous C) lowers; raises; negative D) lowers; raises; positive Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 15) A permanent negative supply shock causes stock prices to ________ than they would if the supply shock were temporary. A) fall more B) fall less C) rise more D) rise less Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 22.10 Web Appendix 2: Aggregate Demand and Supply: A Numerical Example 1) If firms and households form their expectations about inflation by looking at past inflation, this form of expectations formation is known as ________ expectations. A) adaptive B) forward-looking C) rational D) perfect Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 2) Suppose that the short-run aggregate supply curve is: π= 2 + 1.5 (Y-10), where π is inflation and Y is output; and the aggregate demand curve is Y= 11 - 0.5π. The equilibrium output is ________ and the equilibrium inflation rate is ________%. A) 10; 2 B) 17.5; 2 C) 2; 10 D) 10; 7.5 Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking

22.11 Web Appendix 3: The Algebra of the Aggregate Demand and Supply Model 1) The more willing monetary policymakers are to raise interest rates when faced with inflation, the ________ the AD curve is, and the ________ responsive equilibrium output is to the inflation rate. A) steeper; more B) steeper; less C) flatter; more D) flatter; less Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 2) An autonomous easing of monetary policy results in a ________ level of equilibrium output, shifting the aggregate demand curve to the ________. A) higher; right B) lower; right C) higher; left D) lower; left Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 3) The lon-run aggregate supply curve can be expressed by A) output as a function of potential output. B) inflation as a function of past inflation. C) inflation as a function of past inflation and output gap. D) output as a function of inflation and output gap. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 4) In the long-run equilibrium A) output is a function of autonomous expenditures. B) inflation is a function of past inflation. C) inflation equals potential output. D) output equals potential output. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking

22.12 Web Appendix 4: The Taylor Principle and Inflation Stability 1) A central bank that does NOT follow the Taylor principle will fail to raise nominal interest rates by more than the increase in expected inflation. Therefore, higher inflation will lead to a ________ in real interest rates, resulting in ________-sloping monetary policy curves. A) decline; downward B) rise; downward C) rise; upward D) decline; upward Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 2) With downward-sloping monetary policy and IS curves,the aggregate demand curve is A) downward sloping. B) flat. C) vertical. D) upward sloping. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 3) A central bank that does NOT follow the Taylor principle will fail to raise nominal interest rates by more than the increase in expected inflation. As a result, the monetary policy curve is ________ sloping and the aggregate demand curve is ________ sloping. A) upward; downward B) downward; downward C) upward; upward D) downward; upward Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking

Economics of Money, Banking, and Financial Markets, 12e (Mishkin) Chapter 23 Monetary Policy Theory 23.1 Response of Monetary Policy to Shocks 1) Policy makers cannot achieve both price stability and economic activity stability when facing A) temporary supply shocks. B) permanent supply shocks. C) demand shocks. D) all of the above. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 2) The disruption to financial markets starting in August 2007 that caused both consumer and business spending to fall A) shifted the aggregate demand curve to the right. B) shifted the aggregate demand curve to the left. C) shifted the aggregate supply curve to the right. D) shifted the aggregate supply curve to the left. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 3) When the economy is hit by a negative demand shock and the central bank does not respond by changing the autonomous component of monetary policy, then A) inflation will be lower. B) output will be at its potential. C) output will be lower. D) inflation will not change. E) both A and B. Answer: E Ques Status: Previous Edition AACSB: Analytical Thinking 4) When the economy is hit by a negative demand shock and the central bank pursues policies to increase aggregate demand to its initial level, then A) inflation will be lower. B) output will be at its potential. C) output will be lower. D) inflation will be unchanged. E) both B and D. Answer: E Ques Status: Previous Edition AACSB: Analytical Thinking

5) If the economy suffers a permanent negative supply shock because there is an increase in regulations that permanently reduce the level of potential output, then A) potential output falls. B) the long-run aggregate supply curve shifts leftward. C) the short-run aggregate supply curve shifts upward. D) all of the above. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 6) When the economy suffers a permanent negative supply shock and the central bank does not respond by changing the autonomous component of monetary policy, then A) inflation will be lower. B) output will be at its potential. C) output will be lower. D) inflation will not change. E) both A and B. Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 7) When the economy suffers a permanent negative supply shock and the central bank does not respond by changing the autonomous component of monetary policy, then A) inflation will be lower. B) output will be at its potential. C) output will be lower. D) inflation will not change. E) both B and C. Answer: E Ques Status: Previous Edition AACSB: Analytical Thinking 8) When the economy suffers a permanent negative supply shock and the central bank does not respond by changing the autonomous component of monetary policy, then A) inflation will be lower. B) output will be at its potential. C) output will be unchanged. D) inflation will be unchanged. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking

9) When the economy suffers a permanent negative supply shock and the central bank does not respond by changing the autonomous component of monetary policy, then A) inflation will be higher. B) output will be at its potential. C) output will be unchanged. D) inflation will be unchanged. E) both A and B. Answer: E Ques Status: Previous Edition AACSB: Analytical Thinking 10) When the economy suffers a permanent negative supply shock and the central bank responds by changing the autonomous component of monetary policy to keep inflation at the target inflation rate, then A) aggregate demand curve shifts leftward. B) aggregate demand curve shifts rightward. C) output will be unchanged. D) both A and C. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 11) When the economy suffers a permanent negative supply shock and the central bank responds by changing the autonomous component of monetary policy to keep inflation at the target inflation rate, then A) aggregate demand curve shifts leftward. B) output will be unchanged. C) output will be at its potential. D) all of the above. E) both A and C. Answer: E Ques Status: Previous Edition AACSB: Analytical Thinking 12) When the economy is hit by a temporary negative supply shock and the central bank does not respond by changing the autonomous component of monetary policy, then in the long run A) inflation will be lower. B) output will be at its potential. C) output will be lower. D) inflation will be unchanged. E) both B and D. Answer: E Ques Status: Previous Edition AACSB: Analytical Thinking

13) When the economy suffers a temporary negative supply shock and the central bank responds by changing the autonomous component of monetary policy to keep inflation at the target inflation rate, then A) aggregate output drops in the short run. B) output will return to potential output over time. C) aggregate output is stabilized. D) all of the above. E) both A and B. Answer: E Ques Status: Previous Edition AACSB: Analytical Thinking 14) When the economy suffers a temporary negative supply shock, the central bank's autonomous monetary policy to keep inflation at the target inflation rate leads to A) more stable economic activities. B) a large deviation of output from its potential. C) divine coincidence. D) both B and C. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 15) When the economy suffers a temporary negative supply shock and the monetary policy makers try to stabilize economic activity in the short run, then A) aggregate demand curve shifts rightward. B) output will be at its potential. C) inflation rate will be higher. D) all of the above. E) both A and B. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 16) Which of the following statements is CORRECT? A) If most shocks to the economy are aggregate demand shocks or permanent aggregate supply shocks, then policy that stabilizes inflation will also stabilize economic activity, even in the short run. B) If temporary supply shocks are more common, then a central bank must choose between stabilizing inflation and stabilizing output in the short run. C) Stabilizing economic activity in response to a temporary supply shock results in a larger deviation of inflation from the inflation target rather than a stabilization of inflation. D) all of the above. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking

23.2 How Actively Should Policymakers Try to Stabilize Economic Activity? 1) Nonactivists of the policies believe that A) wages and prices are very flexible. B) the self-correcting mechanism is very rapid. C) government action is unnecessary. D) all of the above. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 2) Activists of the policies believe that A) the self-correcting mechanism through wage and price adjustment is very slow. B) wages and prices are sticky. C) the government needs to pursue active policy to eliminate high unemployment when it develops. D) all of the above. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 3) If aggregate output is below the natural rate level, activists of policies would recommend that the government A) do nothing. B) try to eliminate the high unemployment by attempting to shift the aggregate supply curve to the right. C) try to eliminate the high unemployment by attempting to shift the aggregate demand curve to the right. D) try to eliminate the high unemployment by attempting to shift the aggregate demand curve to the left. Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 4) If aggregate output is below the natural rate level, nonactivists of policies would recommend that the government A) do nothing. B) try to eliminate the high unemployment by attempting to shift the aggregate supply curve to the right. C) try to eliminate the high unemployment by attempting to shift the aggregate demand curve to the right. D) try to eliminate the high unemployment by attempting to shift the aggregate demand curve to the left. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 5 Copyright © 2019 Pearson Education, Inc.

5) Nonactivists of policies contend that a policy of shifting the aggregate ________ curve will be costly because it produces ________ volatility in both the price level and output. A) supply; less B) supply; more C) demand; less D) demand; more Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 6) The existence of lags prevents the instantaneous adjustment of the economy to policies changing aggregate demand, thereby strengthening the case for A) supply-side policy. B) nonactivists. C) activists. D) demand-management policy. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 7) The data lag is A) the time it takes for policy makers to obtain data indicating what is happening in the economy. B) the time it takes for policy makers to be sure of what the data are signaling about the future course of the economy. C) the time it takes to pass legislation to implement a particular policy. D) the time it takes for policy makers to change policy instruments once they have decided on the new policy. E) the time it takes for the policy actually to have an impact on the economy. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 8) The recognition lag is A) the time it takes for policy makers to obtain data indicating what is happening in the economy. B) the time it takes for policy makers to be sure of what the data are signaling about the future course of the economy. C) the time it takes to pass legislation to implement a particular policy. D) the time it takes for policy makers to change policy instruments once they have decided on the new policy. E) the time it takes for the policy actually to have an impact on the economy. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking

9) The legislative lag represents A) the time it takes for policy makers to obtain data indicating what is happening in the economy. B) the time it takes for policy makers to be sure of what the data are signaling about the future course of the economy. C) the time it takes to pass legislation to implement a particular policy. D) the time it takes for policy makers to change policy instruments once they have decided on the new policy. E) the time it takes for the policy actually to have an impact on the economy. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 10) The implementation lag is A) the time it takes for policy makers to obtain data indicating what is happening in the economy. B) the time it takes for policy makers to be sure of what the data are signaling about the future course of the economy. C) the time it takes to pass legislation to implement a particular policy. D) the time it takes for policy makers to change policy instruments once they have decided on the new policy. E) the time it takes for the policy actually to have an impact on the economy. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 11) The effectiveness lag is A) the time it takes for policy makers to obtain data indicating what is happening in the economy. B) the time it takes for policy makers to be sure of what the data are signaling about the future course of the economy. C) the time it takes to pass legislation to implement a particular policy. D) the time it takes for policy makers to change policy instruments once they have decided on the new policy. E) the time it takes for the policy actually to have an impact on the economy. Answer: E Ques Status: Previous Edition AACSB: Reflective Thinking

12) The time it takes for policy makers to obtain data indicating what is happening in the economy is called A) the data lag. B) the recognition lag. C) the legislative lag. D) the implementation lag. E) the effectiveness lag. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 13) The time it takes for policy makers to be sure of what the data are signaling about the future course of the economy is called A) the data lag. B) the recognition lag. C) the legislative lag. D) the implementation lag. E) the effectiveness lag. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 14) The time it takes to pass legislation to implement a particular policy is called A) the data lag. B) the recognition lag. C) the legislative lag. D) the implementation lag. E) the effectiveness lag. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 15) The time it takes for policy makers to change policy instruments once they have decided on the new policy is called A) the data lag. B) the recognition lag. C) the legislative lag. D) the implementation lag. E) the effectiveness lag. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking

16) The time it takes for the policy actually to have an impact on the economy is called A) the data lag. B) the recognition lag. C) the legislative lag. D) the implementation lag. E) the effectiveness lag. Answer: E Ques Status: Previous Edition AACSB: Reflective Thinking 17) The nonactivists who opposed the recent fiscal stimulus package argue that A) fiscal stimulus would take too long to work because of long implementation lags. B) fiscal stimulus might kick in after the economy had already recovered. C) fiscal stimulus could lead to increased volatility in inflation and economic activity. D) all of the above. E) none of the above. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 23.3 Inflation: Always and Everywhere a Monetary Phenomenon 1) The economist who proposed that, "Inflation is always and everywhere a monetary phenomenon" was A) John Maynard Keynes. B) John R. Hicks. C) Milton Friedman. D) Franco Modigliani. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 2) Complete Milton Friedman's famous proposition: "Inflation is always and everywhere a ________ phenomenon." A) monetary B) political C) policy D) budgetary Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking

23.4 Causes of Inflationary Monetary Policy 1) To say that inflation is a monetary phenomenon seems to beg the question A) Why does inflationary monetary policy occur? B) Why do politicians seek reelection? C) Why is the Fed independent? D) Why does the U.S. Treasury print so much money? Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 2) The combination of a successful wage push by workers and the government's commitment to high employment leads to A) demand-pull inflation. B) supply-side inflation. C) supply-shock inflation. D) cost-push inflation. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 3) If workers do not believe that policymakers are serious about fighting inflation, they are most likely to push for higher wages, which will ________ aggregate ________ and lead to unemployment or inflation or both, everything else held constant. A) decrease; demand B) increase; demand C) decrease; supply D) increase; supply Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 4) If workers believe that government policymakers will increase aggregate demand to avoid a politically unpopular increase in unemployment when workers demand higher wages, then workers will not fear higher unemployment and their wage demands will result in A) demand-pull inflation. B) hyperinflation. C) deflation. D) cost-push inflation. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking

5) If policymakers set a target for unemployment that is too low because it is less than the natural rate of unemployment, this can set the stage for a higher rate of money growth and A) cost-push inflation. B) demand-pull inflation. C) cost-pull inflation. D) demand-push inflation. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 6) Theoretically, one can distinguish a demand-pull inflation from a cost-push inflation by comparing A) how fast prices rise relative to wages. B) the unemployment rate with its natural rate level. C) when prices rise relative to wages. D) government debt to real GDP. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 7) Demand-pull inflation can result when A) policymakers set an unemployment target that is too high. B) a persistent budget deficit is financed by selling bonds to the public. C) a persistent budget deficit is financed by selling bonds to the central bank. D) workers get numerous wage increases. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 8) Which of the following is least likely to lead to inflationary monetary policy? A) rising unemployment B) expanding federal budget deficits C) declining oil prices D) conflict in the Middle East Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 9) Which of the following is most likely to lead to inflationary monetary policy? A) declining oil prices B) resolution of conflict in the Middle East C) the enactment of a free-trade agreement with Mexico D) rising unemployment Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 11 Copyright © 2019 Pearson Education, Inc.

10) Which of the following is most likely to lead to inflationary monetary policy? A) declining oil prices B) resolution of conflict in the Middle East C) the enactment of a free-trade agreement with Mexico D) rising government budget deficits Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 11) Evidence from the time period 1960-1980 indicates that inflation in the United States resulted from A) an employment target that was set too high. B) the government's inability to sell bonds to the Fed. C) an expansion in the money supply to finance federal government expenditures. D) the excessive sale of government bonds to the public. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 12) Because policies in the United States were too expansionary from 1965 through 1973, the U.S. suffered A) demand-pull inflation. B) cost-push inflation, as workers sought higher wages in order to keep up with inflation. C) both demand-pull and cost-push inflation. D) neither demand-pull nor cost-push inflation. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 13) In the period 1965 through the 1970s, policymakers pursued ________ policies in order to achieve ________. A) expansionary; high employment B) expansionary; low inflation C) contractionary; high employment D) contractionary; low inflation Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking

23.5 Monetary Policy at the Zero Lower Bound 1) When the policy rate hits its lower bound and inflation keeps falling, this portion of the Monetary Policy curve is A) downward sloping. B) upward sloping. C) flat. D) undetermined. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 2) When the policy rate hits its lower bound and inflation keeps falling, this portion of the aggregate demand curve is A) downward sloping. B) upward sloping. C) flat. D) undetermined. Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 3) When output is below potential and the policy rate has hit the floor of zero, the resulting fall in inflation leads to ________ real interest rates, which ________ output further, which causes inflation to fall further. A) lower; increase B) higher; depress C) higher; increase D) lower; depress Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 4) When output is below potential and the policy rate has hit the floor of zero, if policymakers do nothing, output will ________ and inflation will ________. A) rise; fall B) fall; fall C) fall; rise D) rise; rise Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking

5) The real interest rate for investments reflects not only the short-term real interest rate set by the central bank, but also the financial frictions. When the policy rate has hit the floor of zero, to stimulate the economy at given inflation rates, policymakers can A) lower the financial frictions. B) lower the short-term real interest rate. C) lower both the short-term real interest rate and the financial frictions. D) lower the policy rate. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 6) Liquidity provision and asset purchase may not be enough to stimulate the economy unless the these policy actions are able to A) lower the real interest rate for investments. B) lower the short-term real interest rate. C) raise the policy rate above zero. D) lower the policy rate. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 7) The Fed's quantitative easing is to purchase ________ to affect credit spreads. A) long-term securities B) short-term securities C) both long-term and short-term securities D) private assets Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 8) With the policy rate set at zero, the rise in expected inflation will lead to a ________ in the real interest rate, which will cause investment spending and aggregate output to ________. A) fall; rise B) fall; fall C) rise; rise D) rise; fall Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking

9) With the followings is NOT one of the reasons why quantitative easing in and of itself will not necessarily be stimulative? A) Most of the resulting increase in the monetary base just flows into holdings of excess reserves. B) Banks just add to their holdings of excess reserves instead of making loans. C) The asset purchase program involves only the purchase of short-term government securities. D) The asset purchase program involves only the purchase of long-term government securities. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 10) To promote an economic expansion and an exit from the deflationary environment that the Japanese had been experiencing for the past fifteen years, the "Abenomics" aims at A) increasing inflation target. B) increasing inflation expectations. C) purchasing long-term bonds. D) all of the above. E) none of the above. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking

Economics of Money, Banking, and Financial Markets, 12e (Mishkin) Chapter 24 The Role of Expectations in Monetary Policy 24.1 Lucas Critique of Policy Evaluation 1) Whether one views the discretionary policies of the 1960s and 1970s as destabilizing or believes the economy would have been less stable without these policies, most economists agree that A) stabilization policies proved more difficult in practice than many economists had expected. B) stabilization policies proved not to be inflationary. C) the nondiscretionary policymakers were right in believing that the private economy is inherently stable. D) the discretionary policymakers were right in believing that the private economy is inherently stable. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 2) The argument that econometric policy evaluation is likely to be misleading if policymakers assume stable economic relationships is known as A) the monetarist revolution. B) the Lucas critique. C) public choice theory. D) new Keynesian theory. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 3) Lucas argues that when policies change, expectations will change thereby A) changing the relationships in econometric models. B) causing the government to abandon its discretionary stance. C) forcing the Fed to keep its deliberations secret. D) making it easier to predict the effects of policy changes. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 4) The rational expectations hypothesis implies that when macroeconomic policy changes A) the economy will become highly unstable. B) the way expectations are formed will change. C) people will be slow to catch on to the change. D) people will make systematic mistakes. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking

5) The Lucas critique indicates that A) advocates of discretionary policies' criticisms of rational expectations models are wellfounded. B) advocates of discretionary policies' criticisms of rational expectations models are not wellfounded. C) expectations are important in determining the outcome of a discretionary policy. D) expectations are not important in determining the outcome of a discretionary policy. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 6) The Lucas critique is an attack on the usefulness of A) conventional econometric models as forecasting tools. B) conventional econometric models as indicators of the potential impacts on the economy of particular policies. C) rational expectations models of macroeconomic activity. D) the relationship between the quantity theory of money and aggregate demand. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 7) The interest rate thought to have the most important impact on aggregate demand is the A) short-term interest rate. B) T-bill rate. C) rate on 90-day CDs. D) long-term interest rate. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 8) A rise in short-term interest rates that is believed to be only temporary A) is likely to have a significant effect on long-term interest rates. B) will have a bigger impact on long-term interest rates than if the rise in short-term rates had been permanent. C) is likely to have only a small impact on long-term interest rates. D) cannot possibly affect long-term interest rates. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking

9) According to the Lucas critique, if past increases in the short-term interest rate have always been temporary, then A) the term-structure relationship using past data will then show only a weak effect of changes in the short-term interest rate on the long-term rate. B) the term-structure relationship using past data will show no effect of changes in the short-term interest rate on the long-term rate. C) one cannot predict the term-structure relationship as it depends on expectations. D) the term-structure relationship using past data will nevertheless show a strong effect of changes in the short-term interest rate on the long-term rate because of a change in the way expectations are formed. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 24.2 Policy Conduct: Rules or Discretion? 1) A policy in which the money supply is kept growing at a constant rate regardless of the state of the economy is A) a Taylor rule. B) a discretionary policy. C) a policy rule advocated by monetarists. D) advocated by activists. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 2) Arguments for adopting a policy rule include A) the time-inconsistency problem can lead to poor economic outcomes. B) discretionary policies pursue overly expansionary monetary policies to boost employment in the short run but generate higher inflation in the long run. C) policy makers and politicians cannot be trusted. D) all of the above. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 3) Arguments for adopting a policy rule include A) discretion avoids the straightjacket that would lock in the wrong policy if the model that was used to derive the policy rule proved to be incorrect. B) discretion enables policy makers to change policy settings when an economy undergoes structural changes. C) discretionary policies pursue overly expansionary monetary policies to boost employment in the short run but generate higher inflation in the long run. D) all of the above. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 3 Copyright © 2019 Pearson Education, Inc.

4) Arguments for discretionary policies include A) policy rules can be too rigid because they cannot foresee every contingency. B) the time-inconsistency problem can lead to poor economic outcomes. C) discretionary policies pursue overly expansionary monetary policies to boost employment in the short run but generate higher inflation in the long run. D) all of the above. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 5) Arguments for discretionary policies include A) policy rules can be too rigid because they cannot foresee every contingency. B) policy rules do not easily incorporate the use of judgment. C) discretion avoids the straightjacket that would lock in the wrong policy if the model that was used to derive the policy rule proved to be incorrect. D) discretion enables policy makers to change policy settings when an economy undergoes structural changes. E) all of the above. Answer: E Ques Status: Previous Edition AACSB: Reflective Thinking 6) ________ imposes a conceptual structure and inherent discipline on policy makers, but without eliminating all flexibility. A) Constrained discretion B) A policy rule C) A discretionary policy D) The Taylor rule Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking

24.3 The Role of Credibility and a Nominal Anchor 1) A credible nominal anchor A) can help overcome the time-inconsistency problem by providing an expected constraint on discretionary policy. B) can help to anchor inflation expectations, which leads to smaller fluctuations in inflation. C) is required for a policy rule. D) all of the above. E) both A and B. Answer: E Ques Status: Previous Edition AACSB: Reflective Thinking 2) Suppose that there is a positive aggregate demand shock and the central bank commits to an inflation rate target. If the commitment is credible, then A) the public's expected inflation will remain unchanged. B) the short-run aggregate supply curve will not shift. C) over time inflation will fall back down to the inflation target. D) all of the above. E) both A and B. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 3) Suppose that there is a positive aggregate demand shock and the central bank commits to an inflation rate target. But if the commitment is not credible, then A) the public's expected inflation will remain unchanged. B) the short-run aggregate supply curve will rise. C) over time inflation will fall back down to the inflation target. D) all of the above. E) both A and B. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 4) Suppose that there is a negative aggregate demand shock and the central bank commits to an inflation rate target. If the commitment is credible, then A) the public's expected inflation will remain unchanged. B) the short-run aggregate supply curve will rise. C) over time inflation will fall. D) all of the above. E) both A and C. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking

5) Suppose that there is a negative aggregate demand shock and the central bank commits to an inflation rate target. But if the commitment is not credible, then A) the public's expected inflation will remain unchanged. B) the short-run aggregate supply curve will rise. C) economic contraction will be worse. D) all of the above. E) both B and C. Answer: E Ques Status: Previous Edition AACSB: Reflective Thinking 6) Suppose that there is a negative aggregate supply shock and the central bank commits to an inflation rate target. A) If the commitment is credible, the public's expected inflation will remain unchanged. B) Credible policy produces better outcomes on both inflation and output in the short run. C) Policies that are not credible produce worse economic contraction. D) all of the above. E) both A and C. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 7) The U.S. government can play an important role in establishing the credibility of anti-inflation policy by A) demonstrating fiscal responsibility. B) monitoring the Fed. C) conducting fiscal policy. D) all of the above. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking

24.4 Approaches to Establishing Central Bank Credibility 1) Approaches to establishing central bank credibility include A) continued success at keeping inflation under control. B) central bank independence. C) appointment of a more conservative central banker. D) all of the above. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 2) Approaches to establishing central bank credibility include A) continued success at keeping inflation under control. B) inflation targeting. C) exchange rate targeting. D) all of the above. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 3) Approaches to establishing central bank credibility include A) inflation targeting. B) exchange rate targeting. C) central bank independence. D) appointment of a more conservative central banker. E) all of the above. Answer: E Ques Status: Previous Edition AACSB: Reflective Thinking 4) Approaches to establishing central bank credibility include A) inflation targeting. B) nominal GDP targeting. C) central bank independence. D) appointment of a more conservative central banker. E) all of the above. Answer: E Ques Status: Previous Edition AACSB: Reflective Thinking

5) Potential advantages of nominal GDP targeting include A) it implies that the central bank will respond to slowdowns in the real economy even if inflation is not falling. B) real GDP growth that is below potential or inflation that is below the inflation objective will encourage more expansionary monetary policy. C) it focuses not only on controlling inflation but also explicitly on stabilizing real GDP. D) all of the above. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 6) Potential weaknesses of nominal GDP targeting include A) it requires accurate estimates of potential GDP growth, which are not easy to achieve. B) it implies that the central bank will respond to slowdowns in the real economy even if inflation is not falling. C) real GDP growth that is below potential or inflation that is below the inflation objective will encourage more expansionary monetary policy. D) it focuses not only on controlling inflation but also explicitly on stabilizing real GDP. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 7) Potential weaknesses of nominal GDP targeting include A) it is more complicated to explain to the public than inflation targeting and thus the public might be confused about the objectives of the central bank. B) it implies that the central bank will respond to slowdowns in the real economy even if inflation is not falling. C) real GDP growth that is below potential or inflation that is below the inflation objective will encourage more expansionary monetary policy. D) it focuses not only on controlling inflation but also explicitly on stabilizing real GDP. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 8) Potential weaknesses of nominal GDP targeting include A) it requires accurate estimates of potential GDP growth, which are not easy to achieve. B) real GDP growth that is below potential or inflation that is below the inflation objective will encourage more expansionary monetary policy. C) it is more complicated to explain to the public than inflation targeting and thus the public might be confused about the objectives of the central bank. D) both A and C. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking

9) Ending the "Great Inflation" era in the 1970s is an example of A) inflation targeting. B) exchange rate targeting. C) central bank independence. D) appointment of a more conservative central banker. E) all of the above. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking

Economics of Money, Banking, and Financial Markets, 12e (Mishkin) Chapter 25 Transmission Mechanisms of Monetary Policy 25.1 Transmission Mechanism of Monetary Policy 1) Economic theory suggests that ________ interest rates are ________ important than ________ interest rates in explaining investment behavior. A) nominal; more; real B) real; less; nominal C) real; more; nominal D) market; more; real Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 2) According to the traditional interest-rate channel, expansionary monetary policy lowers the real interest rate, thereby raising expenditure on A) business fixed investment. B) government expenditure. C) consumer nondurables. D) net exports. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 3) The monetary transmission mechanism that links monetary policy to GDP through real interest rates and investment spending is called the A) traditional interest-rate channel. B) Tobins' q theory. C) wealth effects. D) cash flow channel. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 4) If the aggregate price level adjusts slowly over time, then an expansionary monetary policy lowers A) only the short-term nominal interest rate. B) only the short-term real interest rate. C) both the short-term nominal and real interest rates. D) the short-term nominal, the short-term real, and the long-term real interest rates. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking

5) If monetary policy can influence ________ prices and conditions in ________ markets, then it can affect spending through channels other than the traditional interest-rate channel. A) asset; labor B) asset; credit C) commodity; labor D) commodity; credit Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 6) An expansionary monetary policy lowers the real interest rate, causing the domestic currency to ________, thereby ________ net exports. A) appreciate; raising B) appreciate; lowering C) depreciate; raising D) depreciate; lowering Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 7) An expansionary monetary policy increases net exports by ________ interest rates and ________ the value of the dollar. A) lowering nominal; decreasing B) lowering real; decreasing C) raising nominal; increasing D) raising real; increasing Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 8) A contractionary monetary policy raises the real interest rate, causing the domestic currency to ________, thereby ________ net exports. A) appreciate; raising B) appreciate; lowering C) depreciate; raising D) depreciate; lowering Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking

9) A contractionary monetary policy decreases net exports by ________ interest rates and ________ the value of the dollar. A) lowering real; decreasing B) lowering real; increasing C) raising nominal; increasing D) raising real; increasing Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 10) Tobin's q is defined as the market value of firms ________ the replacement cost of capital. A) times B) minus C) plus D) divided by Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 11) Tobin's q theory suggests that monetary policy may affect investment spending through its impact on A) stock prices. B) interest rates. C) bond prices. D) cash flow. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 12) In the late 1990s, the stock market bubble ________ the value of Tobin's q, and caused ________ in business equipment. A) increased; underinvestment B) increased; overinvestment C) decreased; underinvestment D) decreased; overinvestment Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 13) During the Great Depression, Tobin's q A) rose dramatically, as did real interest rates. B) fell to unprecedentedly low levels. C) stayed fairly constant, in contrast to most other economic measures. D) rose only slightly, in spite of Hoover's attempts to prop it up. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 3 Copyright © 2019 Pearson Education, Inc.

14) According to Tobin's q theory, ________ policy can affect ________ spending through its effect on the prices of common stock. A) fiscal; consumption B) fiscal; investment C) monetary; consumption D) monetary; investment Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 15) According to Tobin's q theory, when q is ________, firms will not purchase new investment goods because the market value of firms is ________ relative to the cost of capital. A) low; low B) low; high C) high; low D) high; high Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 16) According to Tobin's q theory, if q is ________, new plant and equipment capital is ________ relative to the market value of business firms, so companies can buy a lot of new investment goods with only a ________ issue of stock. A) high; dear; large B) high; cheap; large C) high; cheap; small D) low; cheap; large E) low; cheap; small Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 17) According to Tobin's q theory, when equity prices are low the market price of existing capital is ________ relative to new capital, so expenditure on fixed investment is ________. A) cheap; low B) dear; low C) cheap; high D) dear; high Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking

18) According to Tobin's q theory, when equity prices are high the market price of existing capital is ________ relative to new capital, so expenditure on fixed investment is ________. A) cheap; low B) dear; low C) cheap; high D) dear; high Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 19) Franco Modigliani has found that an expansionary monetary policy can cause stock market prices to ________ and consumption to ________. A) increase; increase B) increase; decrease C) decrease; decrease D) decrease; increase Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 20) Since Regulation Q has been abolished, there have been doubts raised about the size of the effect of the ________ channel. A) balance sheet B) bank lending C) cash flow D) unanticipated price level Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 21) A rise in stock prices ________ the net worth of firms and so leads to ________ investment spending because of the reduction in moral hazard. A) raises; higher B) raises; lower C) reduces; higher D) reduces; lower Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking

22) Because of the presence of asymmetric information problems in credit markets, an expansionary monetary policy causes a ________ in net worth, which ________ the adverse selection problem, thereby ________ increased lending to finance investment spending. A) decline; increases; encouraging B) rise; increases; discouraging C) rise; reduces; encouraging D) decline; reduces; discouraging Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 23) Due to asymmetric information in credit markets, monetary policy may affect economic activity through the balance sheet channel, where an increase in the money supply A) raises stock prices, lowering the cost of new capital relative to firms' market value, thus increasing investment spending. B) raises firms' net worth, decreasing adverse selection and moral hazard problems, thus increasing banks' willingness to lend to finance investment spending. C) raises the level of bank reserves, deposits, and bank loans, thereby raising spending by those individuals who do not have access to credit markets. D) lowers the value of the dollar, increasing net exports and aggregate demand. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 24) An expansionary monetary policy raises firms' cash flows by ________ interest rates. A) lowering real B) lowering nominal C) raising real D) raising nominal Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 25) If a contractionary monetary policy lowers the price level by more than expected, it raises the real value of consumer debt. This reduces consumer expenditure through A) the bank lending channel. B) Tobin's q. C) the traditional interest-rate channel. D) the household liquidity effect. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking

26) An expansionary monetary policy may cause asset prices to rise, thereby reducing the likelihood of financial distress and causing consumer durable and housing expenditures to rise. This monetary transmission mechanism is referred to as A) the household liquidity effect. B) the wealth effect. C) Tobin's q theory. D) the cash flow effect. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 27) According to the household liquidity effect, an expansionary monetary policy causes a ________ in the value of households' financial assets, causing consumer durable expenditure to ________. A) decline; rise B) rise; rise C) rise; fall D) decline; fall Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 28) According to the household liquidity effect, higher stock prices lead to increased consumption expenditures because consumers A) feel more secure about their financial position. B) want to sell stocks and spend the proceeds before stock prices fall. C) believe that their wages will increase due to increased profitability of firms. D) can now afford more expensive imports. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 29) The subprime financial crisis caused a recession because of the ________ in adverse selection and moral hazard problems and the ________ in housing prices. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking

30) Explain the traditional interest-rate channel for expansionary monetary policy. Explain how a tight monetary policy affects the economy through this channel. Answer: In the traditional channel, a monetary expansion reduces real interest rates, lowering the cost of capital and increasing investment spending. The increase in investment increases aggregate demand. A monetary contraction has the opposite effect, raising real interest rates, lowering investment and aggregate spending. Ques Status: Previous Edition AACSB: Reflective Thinking 31) Explain how expansionary and contractionary monetary policies affect aggregate demand through the exchange rate channel. Answer: An expansionary monetary policy reduces real interest rates, causing depreciation of the domestic currency. This depreciation increases net exports and aggregate spending. A monetary contraction increases real interest rates, causing appreciation of the domestic currency, reducing net exports and aggregate spending. Ques Status: Previous Edition AACSB: Reflective Thinking 32) Discuss three channels by which monetary policy affects stock prices and aggregate spending. Answer: The answer should include three of the following: In Tobin's q theory, a monetary expansion increases stock prices, increasing the value of the firm relative to the cost of new capital. This stimulates investment in new capital goods, which in turn increases aggregate spending. A monetary expansion increases stock prices, increasing wealth and stimulating consumption and aggregate spending. Expansionary monetary policy increases equity prices. This improves firms' balance sheets, reducing adverse selection and moral hazard and increasing lending for investment, which increases aggregate spending. In the household liquidity effect, the increase in equity prices due to a monetary expansion improves consumer balance sheets, reducing the probability of financial distress, and increasing consumer spending on durable goods and housing. Ques Status: Previous Edition AACSB: Reflective Thinking

25.2 Lessons for Monetary Policy 1) Analysis of the transmission mechanisms of monetary policy provides four basic lessons for a central bank's conduct of monetary policy. These lessons include the following. A) Rising interest rates indicate a tightening of monetary policy, whereas falling interest rates indicate an easing of monetary policy. B) Monetary policy can be highly effective in reviving a weak economy even if short-term interest rates are already near zero. C) Avoiding fluctuations in the level of unemployment is an important objective of monetary policy, thus providing a rationale for interest-rate stability as the primary long-run goal for monetary policy. D) Other asset prices beside those on short-term debt instruments do not contain important information about the stance of monetary policy because they are not important elements in various monetary policy transmission mechanisms. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 2) Analysis of the transmission mechanisms of monetary policy provides four basic lessons for a central bank's conduct of monetary policy. Which of the following is NOT one of these lessons? A) Rising interest rates indicate a tightening of monetary policy, whereas falling interest rates indicate an easing of monetary policy. B) Monetary policy can be highly effective in reviving a weak economy even if short-term interest rates are already near zero. C) Avoiding unanticipated fluctuations in the price level is an important objective of monetary policy, thus providing a rationale for price stability as the primary long-run goal for monetary policy. D) Other asset prices beside those on short-term debt instruments do not contain important information about the stance of monetary policy because they are important elements in various monetary policy transmission mechanisms. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 3) From 1990s until 2012, the Japanese economy has experienced A) easy monetary policy as indicated by falling nominal interest rates. B) easy monetary policy as indicated by short-term interest rates near zero. C) tight monetary policy as indicated by falling asset prices. D) tight monetary policy as indicated by short-term interest rates near zero. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking

4) From the earlier 1990s until 2012, the Japanese monetary was ________ and stock and real estate prices were ________. A) tight; rising B) easy; rising C) tight; falling D) easy; falling Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 25.3 Web Appendix: Evaluating Empirical Evidence: The Debate Over the Importance of Money in Economic Fluctuations 1) ________ examines whether one variable has an effect on another by simply looking directly at the relationship between the two variables. A) Reduced-form evidence B) Organizational-model evidence C) Direct-model evidence D) Structural-model evidence Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 2) ________ examines whether one variable affects another by using data to build a model that explains the channels through which this variable affects the other. A) Indirect-model evidence B) Organizational-model evidence C) Reduced-form evidence D) Structural-model evidence Answer: D Ques Status: Previous Edition AACSB: Application of Knowledge 3) On the evening news you hear of a scientific study that directly links premature births to cigarette smoking. This is an example of A) direct-model evidence. B) informed voter-model evidence. C) structural-model evidence. D) reduced-form evidence. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking

4) The monetarist-Keynesian debate on the importance of monetary policy is unresolved because monetarists and Keynesians focus on two different types of evidence that generate conflicting conclusions. Monetarists tend to focus on A) structural-model evidence, while Keynesians focus on reduced-form evidence. B) reduced-form evidence, while Keynesians focus on structural-model evidence. C) reduced-form evidence, while Keynesians focus on direct-model evidence. D) structural-model evidence, while Keynesians focus on direct-model evidence. Answer: B Ques Status: Previous Edition AACSB: Application of Knowledge 5) The channels through which monetary policy affects economic activity are called the ________ of monetary policy. A) transmission mechanisms B) flow mechanisms C) distribution mechanisms D) allocational mechanisms Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 6) A model that is composed of many equations that show the channels through which monetary and fiscal policy affect aggregate output and spending is called a A) reduced-form model. B) median-voter model. C) informed median-voter model. D) structural model. Answer: D Ques Status: Previous Edition AACSB: Application of Knowledge 7) Monetarists directly study the link between money and economic activity using A) structural models. B) reduced-form models. C) scientific models. D) experimental models. Answer: B Ques Status: Previous Edition AACSB: Application of Knowledge

8) Which of the following is NOT an advantage of a correctly specified structural model? A) Structural models may help us to more accurately predict the effect that monetary policy has on economic activity. B) A structural model provides more pieces of evidence about monetary policy's effect on economic activity. C) Structural models may allow economists to more accurately predict the impact institutional changes have on the link between monetary policy and income. D) A structural model imposes no restrictions on the way monetary policy affects the economy. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 9) Predicting the impact of institutional change on the effectiveness of monetary policy is best done with a A) structural model. B) reduced-form model. C) black-box model. D) scientific model. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 10) Monetarists contend that the channels of monetary influence in Keynesian structural models are too ________ defined, ________ the importance of monetary policy. A) broadly; exaggerating B) broadly; understating C) narrowly; understating D) narrowly; exaggerating Answer: C Ques Status: Previous Edition AACSB: Application of Knowledge 11) Monetarists' preference for reduced-form models is based on their belief that A) reverse causation is a problem. B) structural models may understate money's effect on economic activity. C) money supply changes are always endogenous. D) monetary policy affects only investment spending. Answer: B Ques Status: Previous Edition AACSB: Application of Knowledge

12) When Keynesians argue that "correlation does not necessarily imply causation," they are probably criticizing A) structural-model evidence. B) reduced-form evidence. C) indirect-model evidence. D) black-box evidence. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 13) Early Keynesians felt that ________ policy was ________, so they stressed the importance of ________ policy. A) fiscal; ineffective; monetary B) monetary; ineffective; fiscal C) monetary; potent; monetary D) fiscal; too potent; monetary Answer: B Ques Status: Previous Edition AACSB: Application of Knowledge 14) Early Keynesians concluded that changes in monetary policy had no impact on aggregate output because early empirical studies found no linkage between movements in ________ and ________. A) nominal interest rates; investment spending B) real interest rates; investment spending C) money supply; aggregate output D) investment spending; aggregate output Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 15) In response to the early Keynesians, monetarists contended that A) monetary policy during the Great Depression was not easy. B) bank failures during the Great Depression were not the cause of the decline in the money supply. C) evidence from the Great Depression demonstrated the ineffectiveness of monetary policy. D) there is a weak link between interest rates and investment spending. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking

16) By the standard of low-grade bonds, interest rates were ________ and monetary policy was ________ during the Great Depression. A) low; tight B) low; easy C) high; tight D) high; easy Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 17) During the Great Depression, real interest rates A) rose to unprecedentedly high levels. B) rose only slightly above the long-run trend. C) fell to unprecedentedly low levels. D) fell only slightly below the long-run trend. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 18) Movements of ________ interest rates indicate that, contrary to the early Keynesians' beliefs, monetary policy was ________ during the Great Depression. A) nominal; tight B) nominal; easy C) real; tight D) real; easy Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 19) Periods of price deflation, such as the Great Depression, are characterized by A) low nominal rates but high real rates of interest. B) low nominal and real interest rates. C) real rates of interest lower than the nominal rate of interest. D) high nominal and real rates of interest. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge

20) In a study published in 1963, Milton Friedman and Anna Schwartz found that in every business cycle they studied over nearly a hundred-year period, the growth rate of the ________ decreased before ________ decreased. A) money supply; interest rates B) money supply; output C) budget deficit; interest rates D) budget deficit; output Answer: B Ques Status: Previous Edition AACSB: Application of Knowledge 21) In a study published in 1963, Milton Friedman and Anna Schwartz found that in every business cycle they studied over nearly a hundred-year period A) the growth rate of the money supply decreased before output decreased. B) interest rates decreased before output decreased. C) the growth rate of federal government spending decreased before output decreased. D) the growth rate of state and local government spending decreased before output decreased. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 22) The monetarist statistical evidence examines the correlations between both ________ and ________ with ________. A) money; aggregate spending; the unemployment rate B) money; autonomous expenditures; the unemployment rate C) money; consumption spending; aggregate spending D) money; autonomous expenditures; aggregate spending Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 23) A criticism of the monetarist autonomous spending variable is that A) some types of autonomous spending do not affect aggregate demand. B) some types of autonomous spending affect aggregate demand before the spending occurs. Some types of autonomous spending affect aggregate demand when they occur. C) some types of autonomous spending affect aggregate demand only long after they occur. D) Keynesians do not think that autonomous spending affects aggregate demand. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking

24) As a result of recent empirical research, there has been a convergence of Keynesian and monetarist opinion to the view that A) money is all that matters. B) money does matter. C) money does not matter. D) fiscal policy is all that matters. Answer: B Ques Status: Previous Edition AACSB: Application of Knowledge 25) Real business cycle theorists are critical of monetarist reduced-form evidence because they believe A) money is the most important cause of changes in aggregate demand. B) there is reverse causation from the business cycle to money. C) there is reverse causation from money to the business cycle. D) business cycles do not exist. Answer: B Ques Status: Previous Edition AACSB: Application of Knowledge 26) Real business cycle theory states that the most important cause of business cycles is A) shocks to the money supply. B) interest rate shocks. C) Federal Reserve policy decisions. D) shocks to tastes and technology. Answer: D Ques Status: Previous Edition AACSB: Application of Knowledge

Economics of Money, Banking, and Financial Markets, 12e (Mishkin) Chapter 26 Web Chapter 1: Financial Crises in Emerging Market Economies 26.1

Dynamics of Financial Crises in Emerging Market Economies

1) Financial crises generally develop along two basic paths A) mismanagement of financial liberalization/globalization and severe fiscal imbalances. B) stock market declines and severe fiscal imbalances. C) mismanagement of financial liberalization/globalization and stock market declines. D) stock market declines and unanticipated declines in the value of the domestic currency. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 2) In emerging market countries, the deterioration in bank's balance sheets has more ________ effects on lending and economic activity than in advanced countries. A) negative B) positive C) affirming D) advancing Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 3) All of the following might create problems from financial liberalization in emerging countries EXCEPT A) ineffective screening of borrowers. B) limits on risk-taking. C) lax government supervision of banks. D) lenders failure to monitor borrowers. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 4) The mismanagement of financial liberalization in emerging market countries can be understood as a severe A) principal/agent problem. B) asymmetric information problem. C) lemons problem. D) free-rider problem. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking

5) Factors likely to cause a financial crisis in emerging market countries include A) severe fiscal imbalances. B) decreases in foreign interest rates. C) a foreign exchange crisis. D) too strong oversight of the financial industry. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 6) The two key factors that trigger speculative attacks on emerging market currencies are A) deterioration in bank balance sheets and severe fiscal imbalances. B) deterioration in bank balance sheets and low interest rates abroad. C) low interest rates abroad and severe fiscal imbalances. D) low interest rates abroad and rising asset prices. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 7) Severe fiscal imbalances can directly trigger a currency crisis since A) investors fear that the government may not be able to pay back the debt and so begin to sell domestic currency. B) the government may stop printing money. C) the government may have to cut back on spending. D) the currency must surely increase in value. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 8) In emerging market countries, many firms have debt denominated in foreign currency like the dollar or yen. A depreciation of the domestic currency A) results in increases in the firm's indebtedness in domestic currency terms, even though the value of their assets remains unchanged. B) results in an increase in the value of the firm's assets. C) means that the firm does not owe as much on their foreign debt. D) strengthens their balance sheet in terms of the domestic currency. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 9) A sharp depreciation of the domestic currency after a currency crisis leads to A) higher inflation. B) lower import prices. C) lower interest rates. D) decrease in the value of foreign currency-denominated liabilities. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 2 Copyright © 2019 Pearson Education, Inc.

10) The key factor leading to the financial crises in Mexico and the East Asian countries was A) a deterioration in banks' balance sheets because of increasing loan losses. B) severe fiscal imbalances. C) a sharp increase in the stock market. D) a sharp decline in interest rates. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 11) Factors that led to worsening conditions in Mexico's 1994-1995 financial markets include A) failure of the Mexican oil monopoly. B) the ratification of the North American Free Trade Agreement. C) increased uncertainty from political shocks. D) decline in interest rates. Answer: C Ques Status: Previous Edition AACSB: Application of Knowledge 12) Factors that led to worsening financial market conditions in East Asia in 1997-1998 include A) weak supervision by bank regulators. B) a rise in interest rates abroad. C) unanticipated increases in the price level. D) increased uncertainty from political shocks. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 13) Factors that led to worsening conditions in Mexico's 1994-1995 financial markets, but did not lead to worsening financial market conditions in East Asia in 1997-1998 include A) rise in interest rates abroad. B) bankers' lack of expertise in screening and monitoring borrowers. C) deterioration of banks' balance sheets because of increasing loan losses. D) stock market decline. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 14) Argentina's financial crisis was due to A) poor supervision of the banking system. B) a lending boom prior to the crisis. C) fiscal imbalances. D) lack of expertise in screening and monitoring borrowers at banking institutions. Answer: C Ques Status: Previous Edition AACSB: Application of Knowledge

15) A feature of debt markets in emerging-market countries is that debt contracts are typically A) very short term. B) long term. C) intermediate term. D) perpetual. Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 16) The economic hardship resulting from a financial crises is severe, however, there are also social consequences such as A) increased crime. B) difficulty getting a loan. C) currency devaluations. D) loss of output. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 17) Before the South Korean financial crisis, sales by the top five chaebols (family-owned conglomerates) were A) nearly 50% of GDP. B) about 10% of GDP. C) almost 90% of GDP. D) nearly 25% of GDP. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 18) The chaebols encouraged the Korean government to open up Korean financial markets to foreign capital. The Korean government responded by A) allowing unlimited short-term foreign borrowing but maintained quantity restrictions on longterm foreign borrowing by financial institutions. B) allowing unlimited short-term and long-term foreign borrowing by financial institutions. C) maintaining quantity restrictions on short-term foreign borrowing but allowing unlimited long-term foreign borrowing by financial institutions. D) not allowing any foreign borrowing by financial institutions. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge

19) At the time of the South Korean financial crisis, the government allowed many chaebol owned finance companies to convert to merchant banks. Finance companies ________ allowed to borrow abroad and merchant banks ________. A) were not; could borrow abroad B) were not; could not borrow abroad C) were; could borrow abroad D) were; could not borrow abroad Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 20) At the time of the South Korean financial crisis, the merchant banks were A) almost virtually unregulated. B) subject to heavy government regulation. C) engaged in long-term lending to the corporate sector. D) restricted to long-term foreign borrowing. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 21) What two key factors trigger speculative attacks leading to currency cries in emerging market countries? Answer: The deterioration in bank balance sheets and severe fiscal imbalances are the key factors. To counter a speculative attack, a country might try to raise interest rates. Raising interest rates, however, would worsen the problem of banks that are already in trouble. Speculators recognize this and seize the opportunity. When their are severe fiscal imbalances, there is concern that government debt will not be paid back. Funds are pulled out of the country and domestic currency is sold leading to a decline in the value of the domestic currency. Speculators will once again seize the opportunity. Ques Status: Previous Edition AACSB: Reflective Thinking

Economics of Money, Banking, and Financial Markets, 12e (Mishkin) Chapter 27 Web Chapter 2: The ISLM Model 27.1 Keynes's Fixed Price Level Assumption and the IS Curve 1) Because inflation was not a serious problem during the Great Depression, Keynes's analysis assumed A) that unemployment also was not a problem. B) that the money supply was fixed. C) that the price level was fixed. D) that monetary policy is not effective. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 2) The money market is in equilibrium A) at any point on the IS curve. B) at any point on the LM curve. C) at only one point on the LM curve. D) only at the intersection of the IS and LM curves. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 3) The ________ describes the combinations of interest rates and aggregate output for which the quantity of money demanded equals the quantity of money supplied. A) IS curve B) LM curve C) consumption function D) investment schedule Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 4) In the Keynesian model the quantity of money demanded is ________ related to income and ________ related to the interest rate. A) positively; positively B) positively; negatively C) negatively; negatively D) negatively; positively Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking

5) According to the liquidity preference theory, the demand for money is ________ related to aggregate output and ________ related to interest rates. A) negatively; negatively B) negatively; positively C) positively; negatively D) positively; positively Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 6) As interest rates rise, the opportunity cost of holding money ________ and the demand for money ________. A) rises; rises B) rises; falls C) falls; rises D) falls; falls Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 7) As aggregate output rises, the demand for money ________ and the interest rate ________, so that money demanded equals money supplied and the money market is in equilibrium. A) increases; rises B) increases; falls C) decreases; rises D) decreases; falls Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 8) Everything else held constant, if aggregate output is to the right of the LM curve, then there is an excess ________ of money which will cause the interest rate to ________. A) supply; fall B) supply; rise C) demand; fall D) demand; rise Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking

9) Everything else held constant, if aggregate output is to the left of the LM curve, then there is an excess ________ of money which will cause the interest rate to ________. A) supply; fall B) supply; rise C) demand; fall D) demand; rise Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 10) Everything else held constant, if aggregate output is to the ________ of the LM curve, then there is an excess supply of money which will cause the interest rate to ________. A) right; fall B) right; rise C) left; fall D) left; rise Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 11) Everything else held constant, if aggregate output is to the ________ of the LM curve, then there is an excess demand of money which will cause the interest rate to ________. A) right; fall B) right; rise C) left; fall D) left; rise Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 12) Everything else held constant, if aggregate output is to the ________ of the LM curve, then there is an excess ________ of money which will cause the interest rate to fall. A) right; supply B) right; demand C) left; supply D) left; demand Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking

13) Everything else held constant, if aggregate output is to the ________ of the LM curve, then there is an excess ________ of money which will cause the interest rate to rise. A) right; supply B) right; demand C) left; supply D) left; demand Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 27.2 ISLM Approach to Aggregate Output and Interest Rates 1) Macroeconomic equilibrium requires A) equilibrium in the goods market. B) equilibrium in the money market. C) equilibrium in both the goods and money markets. D) equilibrium in neither the goods nor the money market. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 2) When the IS and LM curves are combined in the same diagram, the intersection of the two curves determines the equilibrium level of ________ as well as the ________. A) aggregate output; price level B) aggregate output; interest rate C) money supply; price level D) consumer expenditures; interest rate Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 3) If the economy is on the LM curve, but is to the right of the IS curve, aggregate output will ________ and the interest rate will ________. A) rise; rise B) rise; fall C) fall; rise D) fall; fall Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking

4) If the economy is on the LM curve, but is to the left of the IS curve, aggregate output will ________ and the interest rate will ________. A) rise; rise B) rise; fall C) fall; rise D) fall; fall Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 5) If the economy is on the IS curve, but is to the left of the LM curve, aggregate output will ________ and the interest rate will ________. A) rise; rise B) rise; fall C) fall; rise D) fall; fall Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 6) If the economy is on the IS curve, but is to the right of the LM curve, aggregate output will ________ and the interest rate will ________. A) rise; rise B) rise; fall C) fall; rise D) fall; fall Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 7) If the economy is on the IS curve, but is to the left of the LM curve, then the ________ market is in equilibrium, but the interest rate is ________ the equilibrium level. A) goods; below B) goods; above C) money; below D) money; above Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking

8) If the economy is on the LM curve, but is to the right of the IS curve, then the ________ market is in equilibrium, but aggregate ________ exceeds aggregate ________. A) goods; output; demand B) goods; demand; output C) money; output; demand D) money; demand; output Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 27.3 Factors That Cause the LM Curve to Shift 1) An increase in the money supply, other things equal, shifts the ________ curve to the ________. A) IS; right B) IS; left C) LM; left D) LM; right Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 2) If the Federal Reserve conducts open market purchases, the money supply ________, shifting the LM curve to the ________, everything else held constant. A) decreases; right B) decreases; left C) increases; right D) increases; left Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 3) If the Federal Reserve conducts open market sales, the money supply ________, shifting the LM curve to the ________, everything else held constant. A) decreases; right B) decreases; left C) increases; right D) increases; left Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking

4) If the Federal Reserve conducts open market ________, the money supply ________, shifting the LM curve to the right, everything else held constant. A) purchases; decreases B) sales; decreases C) purchases; increases D) sales; increases Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 5) If the Federal Reserve conducts open market ________, the money supply ________, shifting the LM curve to the left, everything else held constant. A) purchases; decreases B) sales; decreases C) purchases; increases D) sales; increases Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 6) An increase in the quantity of money supplied shifts the money supply curve to the ________, and the equilibrium interest rate ________, everything else held constant. A) right; falls B) right; rises C) left; falls D) left; rises Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 7) A decrease in the quantity of money supplied shifts the money supply curve to the ________, and the equilibrium interest rate ________, everything else held constant. A) right; falls B) right; rises C) left; falls D) left; rises Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking

8) An increase in the quantity of money supplied shifts the money supply curve to the ________ and the LM curve to the ________, everything else held constant. A) right; left B) right; right C) left; left D) left; right Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 9) A decrease in the quantity of money supplied shifts the money supply curve to the ________, and the LM curve to the ________, everything else held constant. A) right; left B) right; right C) left; left D) left; right Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 10) A decline in the money ________ shifts the LM curve to the ________, causing the interest rate to rise and output to fall, everything else held constant. A) demand; right B) demand; left C) supply; right D) supply; left Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 11) A decline in the money supply shifts the LM curve to the left, causing the interest rate to ________ and output to ________, everything else held constant. A) rise; rise B) rise; fall C) fall; rise D) fall; fall Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking

12) An increase in the money ________ shifts the LM curve to the ________, causing the interest rate to fall and output to rise, everything else held constant. A) demand; right B) demand; left C) supply; right D) supply; left Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 13) An increase in the money supply shifts the LM curve to the right, causing the interest rate to ________ and output to ________, everything else held constant. A) rise; rise B) rise; fall C) fall; rise D) fall; fall Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 14) When the central bank ________ the money supply, the LM curve shifts to the right, interest rates ________, and equilibrium aggregate output ________, everything else held constant. A) increases; fall; increases B) increases; rise; decreases C) decreases; rise; decreases D) decreases; fall; increases Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 15) An autonomous decrease in money demand, other things equal, shifts the ________ curve to the ________. A) IS; right B) IS; left C) LM; left D) LM; right Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking

16) An autonomous increase in money demand, other things equal, shifts the ________ curve to the ________. A) IS; right B) IS; left C) LM; left D) LM; right Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 17) As bonds become a riskier asset, the demand for money ________ and, all else constant, the equilibrium interest rate ________. A) rises; rises B) rises; falls C) falls; rises D) falls; falls Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking 18) An autonomous rise in ________ shifts the LM curve to the ________, everything else held constant. A) net exports; right B) net exports; left C) money demand; right D) money demand; left Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking

27.4 Changes in Equilibrium Level of the Interest Rate and Aggregate Output 1) In the ISLM framework, an expansionary monetary policy causes aggregate output to ________ and the interest rate to ________, everything else held constant. A) increase; increase B) increase; decrease C) decrease; decrease D) decrease; increase Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 2) An expansionary monetary policy shifts the LM curve to the ________, reducing ________, everything else held constant. A) left; output and increasing interest rates B) left; both real output and interest rates C) right; both interest rates and real output D) right; interest rates and increasing real output Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 3) Everything else held constant, a monetary expansion is characterized by ________ output and ________ interest rates. A) rising; rising B) rising; falling C) falling; rising D) falling; falling Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 4) A contractionary monetary policy shifts the LM curve to the ________, reducing ________, everything else held constant. A) left; output and increasing interest rates B) left; both real output and interest rates C) right; both interest rates and real output D) right; interest rates and increasing real output Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking

5) Everything else held constant, a monetary contraction is characterized by ________ output and ________ interest rates. A) rising; rising B) rising; falling C) falling; rising D) falling; falling Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 6) In the money market, a condition of excess demand for money can be eliminated by a ________ in aggregate output or a ________ in the interest rate, everything else held constant. A) rise; rise B) rise; fall C) fall; rise D) fall; fall Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 7) In the money market, a condition of excess supply of money can be eliminated by a ________ in aggregate output or a ________ in the interest rate, everything else held constant. A) rise; rise B) rise; fall C) fall; rise D) fall; fall Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 8) In the ISLM framework, an expansionary fiscal policy causes aggregate output to ________ and the interest rate to ________, everything else held constant. A) increase; increase B) increase; decrease C) decrease; decrease D) decrease; increase Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking

9) In the ISLM framework a contractionary fiscal policy causes aggregate output to ________ and the interest rate to ________, everything else held constant. A) increase; increase B) increase; decrease C) decrease; decrease D) decrease; increase Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 10) Everything else held constant, an expansionary ________ policy will cause the interest rate to rise, while an expansionary ________ policy will cause the interest rate to fall. A) monetary; monetary B) monetary; fiscal C) fiscal; monetary D) fiscal; fiscal Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 11) Aggregate output and the interest rate are ________ related to government spending and are ________ related to taxes. A) positively; positively B) positively; negatively C) negatively; positively D) negatively; negatively Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 12) An increase in spending that results from expansionary ________ policy causes the interest rate to ________, everything else held constant. A) fiscal; rise B) fiscal; fall C) incomes; rise D) incomes; fall Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking

13) Despite an expansionary monetary policy, an economy experiences a recession. Everything else held constant, the recession could occur in spite of the rightward shift of the LM curve if A) consumer confidence decreases sharply. B) there is an investment boom. C) the money supply increases. D) taxes are cut. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 14) If an economy experiences high interest rates and high unemployment, the ISLM framework predicts that ________ policy has been too ________. A) fiscal; expansionary B) fiscal; contractionary C) monetary; expansionary D) monetary; contractionary Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 15) Which of the following statements concerning Keynesian ISLM analysis is TRUE? A) For a given change in taxes, the IS curve will shift less than for an equal change in government spending. B) Changes in net exports arising from a change in interest rates causes a shift in the IS curve. C) A fall in the money supply shifts the LM curve to the right. D) Expansionary fiscal policy will cause the interest rate to fall. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 16) Referring to the Economic Stimulus Act of 2008, the expansionary effect of the government stimulus was overwhelmed by the continuing deterioration in credit market conditions. Everything else held constant and using the ISLM model, the net effect would cause the ________ curve to ________ and output will ________. A) IS; shift left; decrease B) IS; shift right; increase C) LM; shift right; increase D) LM; shift left; decrease Answer: A Ques Status: Previous Edition AACSB: Analytical Thinking

17) Using the ISLM model, explain the effects of a monetary expansion combined with a fiscal contraction. How do the equilibrium level of output and interest rate change? Answer: The monetary expansion shifts the LM curve to the right which by itself would cause the interest rate to decrease and aggregate output to increase. The fiscal contraction shifts the IS curve to the left which by itself would cause the interest rate to decrease and aggregate output to decrease. Therefore, the equilibrium interest rate unambiguously falls, while the effect on output is indeterminate. Ques Status: Previous Edition AACSB: Reflective Thinking 18) Using the ISLM model, show graphically and explain the effects of a monetary contraction. What is the effect on the equilibrium interest rate and level of output? Answer: See figure below.

The monetary contraction shifts the LM curve to the left. The result is that the equilibrium level of output falls and the equilibrium interest rate increases. Ques Status: Previous Edition AACSB: Reflective Thinking

27.5 Effectiveness Of Monetary Versus Fiscal Policy 1) If the quantity of money demanded is not affected by changes in the interest rate, the LM curve is ________ and fiscal policy will be ________. A) horizontal; very effective B) horizontal; ineffective C) vertical; ineffective D) vertical; very effective Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 2) The LM curve will be vertical and fiscal policy ineffective when A) the demand for money is unaffected by changes in the interest rate. B) the demand for money is unaffected by changes in income. C) investment is unaffected by changes in the interest rate. D) investment is unaffected by changes in income. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 3) The situation in which expansionary fiscal policy does not lead to a rise in aggregate output is referred to as A) fiscal neutrality. B) a recession. C) complete crowding out. D) inflation. Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 4) Crowding out will be more pronounced the closer to vertical is the A) IS curve. B) LM curve. C) consumption function. D) aggregate demand function. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking

5) The less interest-sensitive is money demand, the A) more effective is fiscal policy relative to monetary policy. B) more effective is monetary policy relative to fiscal policy. C) steeper is the IS curve. D) flatter is the LM curve. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 6) The more interest-sensitive is money demand, the A) more effective is fiscal policy relative to monetary policy. B) more effective is monetary policy relative to fiscal policy. C) steeper is the IS curve. D) steeper is the LM curve. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 7) If the economy is characterized by a certain and stable LM curve, then ________ target produces ________ fluctuations in aggregate output. A) an interest rate; smaller B) a money supply; smaller C) a money supply; larger D) an exchange rate; larger Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 8) If the economy is characterized by a stable IS curve and an unstable LM curve, then ________ target produces ________ fluctuations in aggregate output. A) an interest rate; larger B) a money supply; smaller C) a money supply; larger D) an exchange rate; smaller Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 9) If the ________ curve is relatively more unstable than the ________ curve, a money supply target is preferred. A) IS; IS B) IS; LM C) LM; IS D) LM; LM Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 17 Copyright © 2019 Pearson Education, Inc.

10) If the ________ curve is relatively more unstable than the ________ curve, an interest rate target is preferred. A) IS; IS B) IS; LM C) LM; IS D) LM; LM Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 11) If the Fed adopts a policy of pegging the interest rate, a ________ in government spending forces the Fed to increase the money supply to prevent interest rates from ________. A) fall; increasing B) fall; decreasing C) rise; decreasing D) rise; increasing Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking

12) Using the ISLM model, explain and show graphically the effect of a fiscal expansion when the demand for money is completely insensitive to changes in the interest rate. What is this effect called? Answer: See figure below.

This is the total crowding out effect. The LM curve is vertical, so any shift of the IS curve affects only interest rates. The level of output is constant. The fiscal expansion shifts the IS curve rightward, increasing the interest rate. Ques Status: Previous Edition AACSB: Reflective Thinking

13) Show graphically and explain why targeting an interest rate is preferable when money demand is unstable and the IS curve is stable. Answer: See figure below.

Unstable money demand causes the LM curve to shift between LM' and LM". If the money supply is targeted, output fluctuates between Y' and Y". With an interest rate target, output remains stable at Y. Since the objective is to minimize output fluctuations, targeting the interest rate is preferable. Ques Status: Previous Edition AACSB: Reflective Thinking

27.6 ISLM Model In The Long Run 1) The rate of output at which the price level has no tendency to rise or fall is called the A) natural rate of output. B) potential level of income. C) bliss point. D) efficient level of output. Answer: A Ques Status: Previous Edition AACSB: Reflective Thinking 2) In the long-run ISLM model and with everything else held constant, as long as the level of output ________ the natural rate level, the price level will continue to ________, shifting the LM curve to the ________, until finally output is back at the natural rate level. A) exceeds; rise; right B) exceeds; rise; left C) remains below; fall; left D) remains below; rise; right Answer: B Ques Status: Previous Edition AACSB: Analytical Thinking 3) In the long-run ISLM model and with everything else held constant, as long as the level of output ________ the natural rate level, the price level will continue to ________, shifting the LM curve to the ________, until finally output is back at the natural rate level. A) exceeds; rise; right B) exceeds; fall; left C) remains below; fall; right D) remains below; rise; left Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 4) In the long-run ISLM model and with everything else held constant, an increase in the money supply leaves the level of output and interest rates unchanged, an outcome called A) interest rate overshooting. B) long-run money neutrality. C) long-run crowding out. D) the long-run Phillips curve. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking

5) In the long-run ISLM model and with everything else held constant, the long-run effect of an expansionary monetary policy is to A) increase real output and the interest rate. B) not change either real output or the interest rate. C) increase real output and leave the interest rate unchanged. D) increase the interest rate and leave real output unchanged. Answer: B Ques Status: Previous Edition AACSB: Reflective Thinking 6) The long-run neutrality of money refers to the fact that in the long run, monetary policy A) changes only real output. B) changes only the real interest rate. C) changes both real output and the real interest rate. D) has no effect on either real output or the real interest rate. Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 7) In the long-run ISLM model and with everything else held constant, the long-run effect of an expansionary fiscal policy is to ________ real output and ________ the interest rate. A) increase; increase B) not change; not change C) increase; not change D) not change; increase Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 8) In the long-run ISLM model and with everything else held constant, the long-run effect of a contractionary fiscal policy is to ________ real output and ________ the interest rate. A) not change; not change B) decrease; decrease C) decrease; not change D) not change; decrease Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking

9) In the long-run ISLM model and with everything else held constant, the long-run effect of a cut in government spending is to ________ real output and ________ the interest rate. A) increase; increase B) increase; not change C) not change; increase D) not change; decrease Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 10) In the long-run ISLM model and with everything else held constant, the long-run effect of a tax cut is to ________ real output and ________ the interest rate. A) increase; increase B) increase; not change C) not change; increase D) not change; decrease Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 11) In the long-run ISLM model and with everything else held constant, the long-run effect of an autonomous increase in investment is to ________ real output and ________ the interest rate. A) increase; increase B) increase; not change C) not change; increase D) not change; decrease Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking 12) In the long-run ISLM model and with everything else held constant, the long-run effect of a fall in net exports is to ________ real output and ________ the interest rate. A) increase; increase B) increase; not change C) not change; increase D) not change; decrease Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking

13) In the long-run ISLM model and with everything else held constant, the long-run effect of an autonomous fall in consumption expenditure is to ________ real output and ________ the interest rate. A) increase; increase B) increase; not change C) not change; increase D) not change; decrease Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 14) In the long-run the ISLM model predicts that ________ can change real output. A) only monetary policy B) only fiscal policy C) both monetary and fiscal policy D) neither monetary nor fiscal policy Answer: D Ques Status: Previous Edition AACSB: Reflective Thinking 15) If the price level increases, everything else held constant, the ________ curve shifts to the ________. A) IS; right B) IS; left C) LM; left D) LM; right Answer: C Ques Status: Previous Edition AACSB: Reflective Thinking

16) Using the long-run ISLM model, explain and demonstrate graphically the neutrality of money, for the case of an increase in the money supply. Answer: See figure below.

The increase in the money supply shifts LM to the right, increasing output to Y', above the natural rate Y*. The interest rate falls from i to i'. Excess demand increases the price level, reducing the real value of the money supply. The LM curve shifts back until the all pressure on prices is eliminated by the return to the natural rate of output. The initial and final levels of output and interest rate are the same. No real variables have changed. Ques Status: Previous Edition AACSB: Reflective Thinking

27.7 Appendix: Algebra of the ISLM Model 1) In the basic closed-economy ISLM model, the goods market can be described by the A) consumption function. B) investment function. C) government spending and tax. D) goods market equilibrium condition. E) all of the above. Answer: E Ques Status: Previous Edition AACSB: Application of Knowledge 2) In the basic closed-economy ISLM model, the money market can be described by the A) money demand function. B) money supply. C) money market equilibrium condition. D) all of the above. Answer: D Ques Status: Previous Edition AACSB: Application of Knowledge 3) Which of the followings does NOT describe the goods market in the ISLM model? A) consumption function B) investment function C) government spending and tax D) money demand function Answer: D Ques Status: Previous Edition AACSB: Application of Knowledge 4) Which of the followings does NOT describe the goods market in the ISLM model? A) consumption function B) investment function C) government spending and tax D) money supply Answer: D Ques Status: Previous Edition AACSB: Application of Knowledge 5) Which of the followings does NOT describe the money market in the ISLM model? A) money demand function B) investment function C) money market equilibrium condition D) money supply Answer: B Ques Status: Previous Edition AACSB: Application of Knowledge 26 Copyright © 2019 Pearson Education, Inc.

6) In the basic closed-economy ISLM model, the goods market equilibrium condition is A) output = consumption + investment + government spending. B) output = consumption + investment + government spending - tax. C) output = consumption + investment + government spending + net export. D) output = potential output. Answer: A Ques Status: Previous Edition AACSB: Application of Knowledge 7) In the basic closed-economy ISLM model, the money demand is a function of A) output. B) money supply. C) interest rates. D) both A and C. Answer: D Ques Status: Previous Edition AACSB: Application of Knowledge 8) In the basic closed-economy ISLM model, the IS curve can be described by an equation where A) output is a function of consumption. B) money is a function of interest rates. C) output is a function of money. D) output is a function of interest rates. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 9) In the basic closed-economy ISLM model, the LM curve can be described by an equation where A) output is a function of consumption. B) money is a function of interest rates. C) output is a function of money. D) interest rate is a function of output. Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 10) In the basic closed-economy ISLM model, as the interest sensitivity of money demand increases, fiscal policy has ________ effect on output and monetary policy has ________ effect on output. A) less; less B) more; more C) more; less D) less; more Answer: C Ques Status: Previous Edition AACSB: Analytical Thinking 27 Copyright © 2019 Pearson Education, Inc.

11) In the basic closed-economy ISLM model, as the interest sensitivity of investment spending increases, fiscal policy has ________ effect on output and monetary policy has ________ effect on output. A) less; less B) more; more C) more; less D) less; more Answer: D Ques Status: Previous Edition AACSB: Analytical Thinking 12) In the open-economy ISLM model, the goods market equilibrium condition is A) output = consumption + investment + government spending. B) output = consumption + investment + government spending - tax. C) output = consumption + investment + government spending + net export. D) output = potential output. Answer: C Ques Status: Previous Edition AACSB: Application of Knowledge 13) In the open-economy ISLM model, net export is specified as a function of ________ and exchange rate is specified as a function of ________. A) output; output B) money supply; interest rate C) exchange rate; interest rate D) exchange rate; money demand Answer: C Ques Status: Previous Edition AACSB: Application of Knowledge